Is B3 Consulting Group AB (publ)'s (STO:B3) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that B3 Consulting Group's (STO:B3) stock increased significantly by 11% over the past week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on B3 Consulting 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for B3 Consulting 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 B3 Consulting Group is:

23% = kr41m ÷ kr176m (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each SEK1 of shareholders' capital it has, the company made SEK0.23 in profit.

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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

B3 Consulting Group's Earnings Growth And 23% ROE

First thing first, we like that B3 Consulting Group has an impressive ROE. Secondly, even when compared to the industry average of 17% the company's ROE is quite impressive. As a result, B3 Consulting Group's exceptional 35% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that B3 Consulting Group's growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if B3 Consulting Group is trading on a high P/E or a low P/E, relative to its industry.

Is B3 Consulting Group Using Its Retained Earnings Effectively?

B3 Consulting Group's three-year median payout ratio is a pretty moderate 49%, meaning the company retains 51% of its income. So it seems that B3 Consulting 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.

Besides, B3 Consulting Group has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. 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 57%. Still, forecasts suggest that B3 Consulting Group's future ROE will rise to 58% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we are quite pleased with B3 Consulting Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.