Bunzl Inc (LON:BNZL) has had a strong run in the stock market with a significant 9.9% rise in its stock over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In this article, we decided to focus on Bunzl’s ROE.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for Bunzl
How is ROE calculated?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Bunzl is:
20% = £443m ÷ £2.2bn (based on trailing 12 months to December 2021).
The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every £1 of share capital it has, the company has made a profit of £0.20.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Bunzl’s earnings growth and 20% ROE
For starters, Bunzl seems to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 14%. This likely laid the foundation for Bunzl’s moderate 11% net income growth seen over the past five years.
Then, comparing Bunzl’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 9.8% over the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. What is BNZL worth today? The intrinsic value infographic in our free research report visualizes whether BNZL is currently being mispriced by the market.
Is Bunzl using its retained earnings effectively?
Bunzl has a healthy combination of a moderate three-year median payout ratio of 45% (or a retention rate of 55%) and respectable earnings growth, as we saw above, which means that the company has made effective use of its profits.
Additionally, Bunzl is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 38%. As a result, Bunzl’s ROE isn’t expected to change much either, which we’ve inferred from analysts’ estimate of 20% for future ROE.
All in all, we are quite satisfied with Bunzl’s performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.