Yahoo Finance Is Weakness In The Berkeley Group Holdings plc (LON:BKG) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
With its stock down 3.5% over the past month, it is easy to disregard Berkeley Group Holdings (LON:BKG). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Berkeley Group Holdings' ROE.
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.
Check out our latest analysis for Berkeley Group Holdings
How To 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 Berkeley Group Holdings is:
13% = UK£410m ÷ UK£3.1b (Based on the trailing twelve months to April 2020).
The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.13 in profit.
Why Is ROE Important For 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.
Berkeley Group Holdings' Earnings Growth And 13% ROE
At first glance, Berkeley Group Holdings seems to have a decent ROE. Especially when compared to the industry average of 6.9% the company's ROE looks pretty impressive. This probably laid the ground for Berkeley Group Holdings' moderate 5.9% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Berkeley Group Holdings' reported growth was lower than the industry growth of 8.0% in the same period, 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. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Berkeley Group Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Berkeley Group Holdings Making Efficient Use Of Its Profits?
In Berkeley Group Holdings' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 17% (or a retention ratio of 83%), which suggests that the company is investing most of its profits to grow its business.
Besides, Berkeley Group Holdings has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 59% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.
Conclusion
Overall, we are quite pleased with Berkeley Group Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.
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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