BB Stock – Société BIC SA (EPA:BB) Is Up But Financials Look Inconsistent: Which Way Is The Stock Headed?
Société BIC’s (EPA:BB) stock up by 7.1% over the past three months. However, the company’s financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Specifically, we decided to study Société BIC’s ROE in this article.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Société BIC
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Société BIC is:
6.4% = €94m ÷ €1.5b (Based on the trailing twelve months to December 2020).
The ‘return’ is the yearly profit. That means that for every €1 worth of shareholders’ equity, the company generated €0.06 in profit.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
Société BIC’s Earnings Growth And 6.4% ROE
At first glance, Société BIC’s ROE doesn’t look very promising. Although a closer study shows that the company’s ROE is higher than the industry average of 4.3% which we definitely can’t overlook. But then again, seeing that Société BIC’s net income shrunk at a rate of 19% in the past five years, makes us think again. Remember, the company’s ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the decline in earnings could also be the result of this.
Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 2.8% in the same period, we found that Société BIC’s performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.
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. Has the market priced in the future outlook for BB? You can find out in our latest intrinsic value infographic research report.
Is Société BIC Making Efficient Use Of Its Profits?
Société BIC’s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 79% (or a retention ratio of 21%). The business is only left with a small pool of capital to reinvest – A vicious cycle that doesn’t benefit the company in the long-run. You can see the 3 risks we have identified for Société BIC by visiting our risks dashboard for free on our platform here.
In addition, Société BIC 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. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 48% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 12%, over the same period.
On the whole, we feel that the performance shown by Société BIC can be open to many interpretations. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings 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. 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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