Byggmax Group AB (publ) (STO:BMAX) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Most readers would already be aware that Byggmax Group's (STO:BMAX) stock increased significantly by 11% over the past week. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Byggmax Group's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Byggmax Group

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

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

1.1% = kr26m ÷ kr2.4b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every SEK1 of its shareholder's investments, the company generates a profit of SEK0.01.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Byggmax Group's Earnings Growth And 1.1% ROE

It is hard to argue that Byggmax Group's ROE is much good in and of itself. Not just that, even compared to the industry average of 7.7%, the company's ROE is entirely unremarkable. Thus, the low net income growth of 3.3% seen by Byggmax Group over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Byggmax Group's reported growth was lower than the industry growth of 9.3% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Byggmax Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Byggmax Group Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 39% (or a retention ratio of 61% over the past three years, Byggmax Group has seen very little growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Byggmax Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 32%. Still, forecasts suggest that Byggmax Group's future ROE will rise to 8.7% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we have mixed feelings about Byggmax Group. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.