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Boise Cascade (NYSE:BCC) has had a great run on the share market with its stock up by a significant 11% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Boise Cascade's ROE in this article.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Boise Cascade
How Is ROE Calculated?
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 Boise Cascade is:
21% = US$164m ÷ US$778m (Based on the trailing twelve months to September 2020).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.21 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Boise Cascade's Earnings Growth And 21% ROE
To start with, Boise Cascade's ROE looks acceptable. Especially when compared to the industry average of 15% the company's ROE looks pretty impressive. This probably laid the ground for Boise Cascade's moderate 9.0% net income growth seen over the past five years.
Next, on comparing Boise Cascade's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.2% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Boise Cascade's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.