PBT Group Limited's (JSE:PBG) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

PBT Group (JSE:PBG) has had a great run on the share market with its stock up by a significant 31% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study PBT Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

ROE 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 PBT Group is:

35% = R99m ÷ R281m (Based on the trailing twelve months to March 2025).

The 'return' refers to a company's earnings over the last year. That means that for every ZAR1 worth of shareholders' equity, the company generated ZAR0.35 in profit.

View our latest analysis for PBT Group

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

PBT Group's Earnings Growth And 35% ROE

Firstly, we acknowledge that PBT Group has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. This probably laid the groundwork for PBT Group's moderate 13% net income growth seen over the past five years.

As a next step, we compared PBT Group'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 46% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is PBG fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is PBT Group Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 69% (or a retention ratio of 31%) for PBT Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, PBT Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that PBT Group certainly does have some positive factors to consider. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. 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 PBT Group'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.