Advertisement
Australia markets closed
  • ALL ORDS

    8,120.20
    -11.90 (-0.15%)
     
  • AUD/USD

    0.6671
    -0.0000 (-0.01%)
     
  • ASX 200

    7,851.70
    -12.00 (-0.15%)
     
  • OIL

    78.73
    -1.07 (-1.34%)
     
  • GOLD

    2,420.80
    -17.70 (-0.73%)
     
  • Bitcoin AUD

    106,426.49
    +5,697.16 (+5.66%)
     
  • CMC Crypto 200

    1,532.77
    +44.23 (+2.97%)
     

Are Strong Financial Prospects The Force That Is Driving The Momentum In Beacon Lighting Group Limited's ASX:BLX) Stock?

Beacon Lighting Group (ASX:BLX) has had a great run on the share market with its stock up by a significant 30% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Beacon Lighting Group's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Beacon Lighting Group

How Is ROE Calculated?

The formula for ROE is:

ADVERTISEMENT

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

So, based on the above formula, the ROE for Beacon Lighting Group is:

19% = AU$31m ÷ AU$160m (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.19 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Beacon Lighting Group's Earnings Growth And 19% ROE

At first glance, Beacon Lighting Group seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 17%. This probably goes some way in explaining Beacon Lighting Group's moderate 15% growth over the past five years amongst other factors.

Next, on comparing Beacon Lighting Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 18% over the last few years.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for BLX? You can find out in our latest intrinsic value infographic research report.

Is Beacon Lighting Group Making Efficient Use Of Its Profits?

Beacon Lighting Group has a significant three-year median payout ratio of 52%, meaning that it is left with only 48% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Beacon Lighting Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 69% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

On the whole, we feel that Beacon Lighting Group's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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

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.