Does Beach Energy Limited’s (ASX:BPT) latest stock performance reflect its financial health?

Beach Energy (ASX:BPT) stock is up 10% in the past month. Given that the market rewards strong long-term financials, we wonder if this is the case in this case. In this article, we decided to focus on the ROE of Beach Energy.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Beach Energy

How do you calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Beach Energy is:

10% = AU$317 million ÷ AU$3.1 billion (based on trailing 12 months to June 2021).

The “yield” is the amount earned after tax over the last twelve months. This therefore means that for every A$1 of investment by its shareholder, the company generates a profit of A$0.10.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Beach Energy earnings growth and ROE of 10%

For starters, Beach Energy’s ROE looks acceptable. Especially when compared to the industry average of 4.9%, the company’s ROE looks quite impressive. Probably because of this, Beach Energy has been able to see an impressive net income growth of 28% over the past five years. However, there could also be other causes behind this growth. Such as – high revenue retention or effective management in place.

We then compared Beach Energy’s net income growth with the industry and we are happy to see that the company’s growth figure is higher compared to the industry which has a growth rate of 14% in during the same period.

ASX: BPT Past Earnings Growth January 17, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. If you’re wondering about Beach Energy’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.

Does Beach Energy use its retained earnings effectively?

Beach Energy’s three-year median payout ratio is below 11%, meaning it keeps a higher percentage (89%) of its earnings. So it looks like Beach Energy is massively reinvesting its earnings to grow its business, which is reflected in its earnings growth.

Additionally, Beach Energy is committed to continuing to share its earnings with shareholders, which we infer from its long history of paying dividends for at least ten years. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to reach 16% over the next three years. Either way, ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

Overall, we’re pretty happy with Beach Energy’s performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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