Are Robust Financials Driving The Recent Rally In Bloomsbury Publishing Plc's (LON:BMY) Stock?

editorial-team@simplywallst.com (Simply Wall St)

Sun, Apr 21, 2024, 2:41 AM 4 min read

Most readers would already be aware that Bloomsbury Publishing's (LON:BMY) stock increased significantly by 19% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Bloomsbury Publishing's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Bloomsbury Publishing

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Bloomsbury Publishing is:

12% = UK£21m ÷ UK£183m (Based on the trailing twelve months to August 2023).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.12 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Bloomsbury Publishing's Earnings Growth And 12% ROE

To begin with, Bloomsbury Publishing seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 11%. Consequently, this likely laid the ground for the decent growth of 20% seen over the past five years by Bloomsbury Publishing.

Next, on comparing Bloomsbury Publishing's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 20% over the last few years.

past-earnings-growth — LSE:BMY Past Earnings Growth April 21st 2024

Earnings growth is a huge factor in stock valuation. 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. Is BMY fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Bloomsbury Publishing Making Efficient Use Of Its Profits?

Bloomsbury Publishing has a three-year median payout ratio of 47%, which implies that it retains the remaining 53% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Bloomsbury Publishing is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 40%. Accordingly, forecasts suggest that Bloomsbury Publishing's future ROE will be 12% which is again, similar to the current ROE.

Summary

On the whole, we feel that Bloomsbury Publishing's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.