Beluga Group Public Joint-Stock Company's (MCX:BELU) Stock Is Going Strong: Is the Market Following Fundamentals?

Beluga Group's (MCX:BELU) stock is up by a considerable 87% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Beluga Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Beluga Group

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Beluga Group is:

14% = ₽2.8b ÷ ₽20b (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. So, this means that for every RUB1 of its shareholder's investments, the company generates a profit of RUB0.14.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Beluga Group's Earnings Growth And 14% ROE

When you first look at it, Beluga Group's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 8.9% which we definitely can't overlook. Especially when you consider Beluga Group's exceptional 47% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Beluga Group's growth is quite high when compared to the industry average growth of 5.4% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Beluga Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Beluga Group Using Its Retained Earnings Effectively?

Beluga Group has a three-year median payout ratio of 34% (where it is retaining 66% of its income) which is not too low or not too high. So it seems that Beluga Group is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Along with seeing a growth in earnings, Beluga Group only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we are quite pleased with Beluga Group's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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