The action of Bumitama Agri Ltd. (SGX:P8Z) is doing well: is the market following the fundamentals?

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Bumitama Agri (SGX:P8Z) stock is up 9.3% over the past week. 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. Specifically, we decided to study the ROE of Bumitama Agri in this article.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for Bumitama Agri

How to calculate return on equity?

ROE can be calculated using the formula:

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

So, based on the formula above, the ROE of Bumitama Agri is:

29% = Rp4.1t ÷ Rp14t (Based on the last twelve months to June 2022).

The “return” is the annual profit. Another way to think about this is that for every 1 SGD worth of equity, the company was able to make a profit of 0.29 SGD.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Bumitama Agri’s profit growth and 29% ROE

First, we recognize that Bumitama Agri has a significantly high ROE. Second, even compared to the industry average of 9.9%, the company’s ROE is quite impressive. This likely laid the foundation for Bumitama Agri’s moderate net income growth of 16% over the past five years.

We then performed a comparison between Bumitama Agri’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 15% over the same period.

SGX: P8Z Past Earnings Growth October 20, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. If you’re wondering about Bumitama Agri’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Does Bumitama Agri effectively use its retained earnings?

Bumitama Agri has a healthy combination of a moderate three-year median payout ratio of 39% (or a retention rate of 61%) and respectable earnings growth, as we saw above, this which means that the company has made efficient use of its profits.

Additionally, Bumitama Agri has paid dividends over a nine-year period, which means the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 40%. However, Bumitama Agri’s future ROE is expected to decline to 15% despite little change expected in the company’s payout ratio.

Conclusion

All in all, we are quite satisfied with Bumitama Agri’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, in studying the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

Valuation is complex, but we help make it simple.

Find out if Bumitama Agri is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

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.

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