Could The Market Be Wrong About Buzzi S.p.A. (BIT:BZU) Given Its Attractive Financial Prospects?

Simply Wall St · 10/15 04:10

Buzzi (BIT:BZU) has had a rough three months with its share price down 5.2%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Buzzi's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Buzzi

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Buzzi is:

16% = €957m ÷ €6.0b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.16 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Buzzi's Earnings Growth And 16% ROE

At first glance, Buzzi seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.2%. This probably laid the ground for Buzzi's moderate 18% net income growth seen over the past five years.

As a next step, we compared Buzzi's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 13%.

past-earnings-growth
BIT:BZU Past Earnings Growth October 15th 2024

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. Is BZU fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Buzzi Using Its Retained Earnings Effectively?

Buzzi's three-year median payout ratio to shareholders is 12% (implying that it retains 88% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Buzzi is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 15% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

Overall, we are quite pleased with Buzzi's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.