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Do Its Financials Have Any Role To Play In Driving Brooks Automation, Inc.'s (NASDAQ:BRKS) Stock Up Recently?

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Brooks Automation (NASDAQ:BRKS) has had a great run on the share market with its stock up by a significant 33% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Brooks Automation's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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Check out our latest analysis for Brooks Automation

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Brooks Automation is:

2.5% = US$28m ÷ US$1.2b (Based on the trailing twelve months to March 2020).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.02.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Brooks Automation's Earnings Growth And 2.5% ROE

As you can see, Brooks Automation's ROE looks pretty weak. Even when compared to the industry average of 10%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Brooks Automation grew its net income at a significant rate of 35% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Brooks Automation's growth is quite high when compared to the industry average growth of 19% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Brooks Automation is trading on a high P/E or a low P/E, relative to its industry.

Is Brooks Automation Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 81% (implying that it keeps only 19% of profits) for Brooks Automation suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Brooks Automation has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 28% over the next three years.

Conclusion

In total, it does look like Brooks Automation has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.