It is hard to get excited after looking at Bisalloy Steel Group's (ASX:BIS) recent performance, when its stock has declined 8.5% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Bisalloy Steel Group'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 Bisalloy Steel Group
How Is ROE Calculated?
ROE 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 Bisalloy Steel Group is:
22% = AU$15m ÷ AU$68m (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.22 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
Bisalloy Steel Group's Earnings Growth And 22% ROE
First thing first, we like that Bisalloy Steel Group has an impressive ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. So, the substantial 35% net income growth seen by Bisalloy Steel Group over the past five years isn't overly surprising.
As a next step, we compared Bisalloy Steel Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 29%.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is Bisalloy Steel Group fairly valued compared to other companies? These 3 valuation measures might help you decide.