Is Bowler Metcalf Limited's (JSE:BCF) Recent Price Movement Underpinned By Its Weak Fundamentals?

With its stock down 14% over the past three months, it is easy to disregard Bowler Metcalf (JSE:BCF). It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Bowler Metcalf's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Our analysis indicates that BCF is potentially undervalued!

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Bowler Metcalf is:

12% = R83m ÷ R704m (Based on the trailing twelve months to June 2022).

The 'return' is the yearly profit. Another way to think of that is that for every ZAR1 worth of equity, the company was able to earn ZAR0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Bowler Metcalf's Earnings Growth And 12% ROE

At first glance, Bowler Metcalf's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 13%, we may spare it some thought. Having said that, Bowler Metcalf's net income growth over the past five years is more or less flat. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

As a next step, we compared Bowler Metcalf's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Bowler Metcalf's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Bowler Metcalf Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 42% (meaning the company retains58% of profits) in the last three-year period, Bowler Metcalf's earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Bowler Metcalf 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.

Conclusion

Overall, we have mixed feelings about Bowler Metcalf. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Bowler Metcalf's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.