Bisalloy Steel Group Limited's (ASX:BIS) Stock Is Going Strong: Is the Market Following Fundamentals?
Most readers would already be aware that Bisalloy Steel Group's (ASX:BIS) stock increased significantly by 17% 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 Bisalloy Steel Group's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Bisalloy Steel Group
How To 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 Bisalloy Steel Group is:
19% = AU$8.0m ÷ AU$43m (Based on the trailing twelve months to December 2020).
The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.19.
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. 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.
Bisalloy Steel Group's Earnings Growth And 19% ROE
To start with, Bisalloy Steel Group's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 15%. This certainly adds some context to Bisalloy Steel Group's exceptional 33% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing Bisalloy Steel Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 29% 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 Bisalloy Steel Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Bisalloy Steel Group Making Efficient Use Of Its Profits?
The three-year median payout ratio for Bisalloy Steel Group is 40%, which is moderately low. The company is retaining the remaining 60%. So it seems that Bisalloy Steel Group is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Moreover, Bisalloy Steel Group is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.
Summary
On the whole, we feel that Bisalloy Steel Group'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 2 risks we have identified for Bisalloy Steel Group.
This article by Simply Wall St is general in nature. 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.
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