Is Bakkavor Group plc (LON: BAKK) share price struggling due to mixed financial results?
With its stock down 9.0% over the past month, it’s easy to overlook Bakkavor Group (LON: BAKK). It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more heavily on the negative aspects. Long-term fundamentals usually determine market performance, so special attention should be paid to them. In particular, we will pay special attention to the ROE of Bakkavor Group today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Consult our latest analysis for the Bakkavor group
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of the Bakkavor group is:
5.7% = £ 34million £ 598million (based on the last twelve months up to December 2020).
The “return” is the annual profit. Another way to think about it is that for every £ 1 worth of equity, the company was able to make £ 0.06 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Profit growth of the Bakkavor group and 5.7% of ROE
At first glance, Bakkavor Group’s ROE does not look very promising. A quick follow-up study shows that the company’s ROE also does not compare favorably to the industry average of 8.2%. For this reason, Bakkavor Group’s 5.9% drop in net profit over five years is not surprising given its lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. Such as – low profit retention or misallocation of capital.
So, in the next step, we compared the performance of Bakkavor Group to that of the industry and were disappointed to find that if the company reduced its profits, the industry increased its profits at a rate of 2, 8% over the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading for clear blue waters or swampy waters ahead. Has the market taken into account BAKK’s future prospects? You can find out in our latest Intrinsic Value infographic research report.
Does the Bakkavor Group use its profits effectively?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. This implies that potentially all of its profits are reinvested in the business.
Overall, we believe that the performance shown by Bakkavor Group can be open to many interpretations. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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