Big River Industries Limited's (ASX:BRI) Stock Is Going Strong: Is the Market Following Fundamentals?

Big River Industries' (ASX:BRI) stock is up by a considerable 23% 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. In this article, we decided to focus on Big River Industries' ROE.

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.

View our latest analysis for Big River Industries

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 Big River Industries is:

16% = AU$17m ÷ AU$105m (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.16 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Big River Industries' Earnings Growth And 16% ROE

At first glance, Big River Industries seems to have a decent ROE. Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. Probably as a result of this, Big River Industries was able to see an impressive net income growth of 24% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Big River Industries' 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 8.8% in the same period.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is BRI fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Big River Industries Making Efficient Use Of Its Profits?

Big River Industries has a three-year median payout ratio of 45% (where it is retaining 55% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Big River Industries is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Big River Industries is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 57% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

On the whole, we feel that Big River Industries' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.