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Biglari Holdings (NYSE:BH.A) has had a great run on the share market with its stock up by a significant 29% over the last three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Biglari Holdings' 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 Biglari Holdings
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 Biglari Holdings is:
2.0% = US$13m ÷ US$619m (Based on the trailing twelve months to March 2024).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.02 in profit.
What Is The Relationship Between ROE And 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.
Biglari Holdings' Earnings Growth And 2.0% ROE
It is hard to argue that Biglari Holdings' ROE is much good in and of itself. Not just that, even compared to the industry average of 18%, the company's ROE is entirely unremarkable. Therefore, the disappointing ROE therefore provides a background to Biglari Holdings' very little net income growth of 2.1% over the past five years.
As a next step, we compared Biglari Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 26% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Biglari Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.