Is Weakness In Breville Group Limited (ASX:BRG) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Breville Group (ASX:BRG) has had a rough three months with its share price down 6.3%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Breville Group's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

Return on equity 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 Breville Group is:

14% = AU$132m ÷ AU$973m (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.14.

Check out our latest analysis for Breville Group

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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Breville Group's Earnings Growth And 14% ROE

To start with, Breville Group's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This certainly adds some context to Breville Group's moderate 12% net income growth seen over the past five years.

When you consider the fact that the industry earnings have shrunk at a rate of 8.3% in the same 5-year period, the company's net income growth is pretty remarkable.

Earnings growth is an important metric to consider when valuing a stock. 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. Is BRG fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Breville Group Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 39% (implying that the company retains 61% of its profits), it seems that Breville Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Breville Group 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 over the next three years is expected to be approximately 40%. As a result, Breville Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 15% for future ROE.

Summary

On the whole, we feel that Breville Group's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.