In This Article:
Baby Bunting Group (ASX:BBN) has had a rough three months with its share price down 25%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to Baby Bunting Group's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Baby Bunting Group
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Baby Bunting Group is:
9.5% = AU$9.8m ÷ AU$103m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.10 in profit.
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. 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. 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.
Baby Bunting Group's Earnings Growth And 9.5% ROE
When you first look at it, Baby Bunting Group's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 17%, the company's ROE leaves us feeling even less enthusiastic. Thus, the low net income growth of 4.1% seen by Baby Bunting Group over the past five years could probably be the result of the low ROE.
As a next step, we compared Baby Bunting 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 18% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Baby Bunting Group fairly valued compared to other companies? These 3 valuation measures might help you decide.