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It is hard to get excited after looking at A.G. BARR's (LON:BAG) recent performance, when its stock has declined 6.9% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to A.G. BARR'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.
See our latest analysis for A.G. BARR
How Do You Calculate Return On Equity?
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 A.G. BARR is:
11% = UK£28m ÷ UK£248m (Based on the trailing twelve months to January 2022).
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 £0.11 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of A.G. BARR's Earnings Growth And 11% ROE
To start with, A.G. BARR's ROE looks acceptable. Even when compared to the industry average of 14% the company's ROE looks quite decent. However, while A.G. BARR has a pretty respectable ROE, its five year net income decline rate was 8.8% . We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.
As a next step, we compared A.G. BARR's performance with the industry and found thatA.G. BARR's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 0.1% in the same period, which is a slower than the company.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 BAG fairly valued? This infographic on the company's intrinsic value has everything you need to know.