Beacon Lighting Group (ASX:BLX) has had a rough week with its share price down 5.7%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Beacon Lighting Group's ROE.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Beacon Lighting Group is:
17% = AU$30m ÷ AU$178m (Based on the trailing twelve months to December 2024).
The 'return' is the income the business earned over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.17.
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
Beacon Lighting Group's Earnings Growth And 17% ROE
To begin with, Beacon Lighting Group seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 15%. Beacon Lighting Group's decent returns aren't reflected in Beacon Lighting Group'smediocre five year net income growth average of 4.3%. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
Next, on comparing with the industry net income growth, we found that Beacon Lighting Group's reported growth was lower than the industry growth of 7.2% over the last few years, which is not something we like to see.
ASX:BLX Past Earnings Growth April 23rd 2025
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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for BLX? You can find out in our latest intrinsic value infographic research report.
Is Beacon Lighting Group Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 56% (that is, the company retains only 44% of its income) over the past three years for Beacon Lighting Group suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.
Moreover, Beacon Lighting Group has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 62%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 18%.
Summary
In total, it does look like Beacon Lighting Group has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
