Are Strong Financial Prospects The Force That Is Driving The Momentum In Brickability Group Plc's LON:BRCK) Stock?

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

Mon, Nov 4, 2024, 6:22 AM 4 min read

Brickability Group (LON:BRCK) has had a great run on the share market with its stock up by a significant 8.8% 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 Brickability Group's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Brickability Group

How To Calculate Return On Equity?

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 Brickability Group is:

8.0% = UK£15m ÷ UK£192m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.08 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 Brickability Group's Earnings Growth And 8.0% ROE

On the face of it, Brickability Group's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 5.8% doesn't go unnoticed by us. Particularly, the substantial 28% net income growth seen by Brickability Group over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

We then compared Brickability Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 6.5% in the same 5-year period.

past-earnings-growth — AIM:BRCK Past Earnings Growth November 4th 2024

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Brickability Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Brickability Group Using Its Retained Earnings Effectively?

Brickability Group's three-year median payout ratio is a pretty moderate 47%, meaning the company retains 53% of its income. By the looks of it, the dividend is well covered and Brickability Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Brickability Group has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 33% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 18%, over the same period.

Summary

Overall, we are quite pleased with Brickability Group's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.