With its stock down 20% over the past three months, it is easy to disregard Bystronic (VTX:BYS). We decided to study the company’s financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Bystronic’s ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Bystronic
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Bystronic is:
6.9% = CHF49m ÷ CHF712m (Based on the trailing twelve months to June 2023).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every CHF1 of its shareholder’s investments, the company generates a profit of CHF0.07.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Bystronic’s Earnings Growth And 6.9% ROE
On the face of it, Bystronic’s ROE is not much to talk about. Next, when compared to the average industry ROE of 17%, the company’s ROE leaves us feeling even less enthusiastic. For this reason, Bystronic’s five year net income decline of 25% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as – low earnings retention or poor allocation of capital.
However, when we compared Bystronic’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 2.2% in the same period. This is quite worrisome.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for BYS? You can find out in our latest intrinsic value infographic research report.
Is Bystronic Efficiently Re-investing Its Profits?
Bystronic’s very high three-year median payout ratio of 222% over the last three years suggests that the company is paying its shareholders more than what it is earning and this explains the company’s shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. Our risks dashboard should have the 2 risks we have identified for Bystronic.
Additionally, Bystronic has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 46% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 9.8%, over the same period.
Summary
On the whole, Bystronic’s performance is quite a big let-down. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page 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.
