Could The Market Be Wrong About Bilia AB (publ) (STO:BILI A) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Bilia's (STO:BILI A) recent performance, when its stock has declined 14% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Bilia's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Bilia

How Do You Calculate Return On Equity?

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 Bilia is:

25% = kr984m ÷ kr4.0b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each SEK1 of shareholders' capital it has, the company made SEK0.25 in profit.

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.

A Side By Side comparison of Bilia's Earnings Growth And 25% ROE

To begin with, Bilia has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. This probably laid the groundwork for Bilia's moderate 5.9% net income growth seen over the past five years.

As a next step, we compared Bilia's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 0.5%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Bilia fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bilia Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 66% (or a retention ratio of 34%) for Bilia suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Bilia has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with Bilia's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Up till now, we've only made a short study of the company's growth data. You can do your own research on Bilia and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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