Burberry Group plc (LON: BRBY) stock recently showed weakness, but the financial outlook looks correct: is the market wrong?

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With its inventory down 18% over the past three months, it’s easy to overlook the Burberry Group (LON: BRBY). But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. Specifically, we have decided to study the ROE of Burberry Group in this article.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

Check out our latest analysis for the Burberry group

How to calculate return on equity?

The formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, based on the above formula, the ROE of the Burberry group is:

24% = £ 376m £ 1.6bn (based on the last twelve months to March 2021).

“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every £ 1 of shareholder capital it has, the company has made £ 0.24 in profit.

What does ROE have to do with profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.

Burberry group profit growth and 24% ROE

For starters, Burberry Group has a pretty high ROE, which is interesting. Even compared to the industry average of 24%, the company’s ROE is pretty decent. As one would expect, the 8.3% drop in net profit reported by the Burberry Group is somewhat surprising. So there could be other aspects that could explain this. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.

From the 8.3% drop reported by the industry over the same period, we infer that the Burberry Group and its industry are both shrinking at a similar rate.

past profit growth

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. What is BRBY worth today? The intrinsic value infographic in our free research report helps to visualize whether BRBY is currently being poorly valued by the market.

Is the Burberry group effectively reinvesting its profits?

Despite a normal three-year median payout rate of 49% (i.e. a retention rate of 51%), the fact that the Burberry Group’s profits have declined is quite puzzling. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.

Additionally, the Burberry Group has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of corporate growth. ‘business. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 55% of its profits over the next three years. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 21%.

Summary

All in all, it seems that the Burberry group has positive aspects in its activity. However, we are disappointed to see a lack of earnings growth despite a high ROE and a high reinvestment rate. We believe there could be external factors that could negatively impact the business. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 material. Simply Wall St has no position in the mentioned stocks.

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.


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