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Most readers would already know that B&M European Value Retail's (LON:BME) stock increased by 4.7% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to B&M European Value Retail's ROE today.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for B&M European Value Retail
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 B&M European Value Retail is:
58% = UK£428m ÷ UK£733m (Based on the trailing twelve months to March 2021).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.58.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
B&M European Value Retail's Earnings Growth And 58% ROE
Firstly, we acknowledge that B&M European Value Retail has a significantly high ROE. Secondly, even when compared to the industry average of 29% the company's ROE is quite impressive. Under the circumstances, B&M European Value Retail's considerable five year net income growth of 22% was to be expected.
When you consider the fact that the industry earnings have shrunk at a rate of 1.7% in the same period, the company's net income growth is pretty remarkable.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is BME fairly valued? This infographic on the company's intrinsic value has everything you need to know.