Beta Systems Software (FRA:BSS) has had a difficult month with a share price drop of 6.6%. But if you pay close attention, you might conclude that its strong financials could mean the stock could potentially appreciate in value in the long term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Beta Systems Software’s ROE.
Return on equity or ROE is an important measure used to assess how efficiently a company’s management is using the company’s capital. In other words, it shows how successful the company is in converting shareholder investments into profits.
Check out our latest analysis for Beta Systems Software
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Beta Systems Software is:
31% = €6.8 million ÷ €22 million (based on the last twelve months to September 2023).
The ‘return’ is the annual profit. That means that for every €1 of equity, the company generated €0.31 in profit.
What is the relationship between ROE and earnings growth?
We’ve already established that ROE serves as an efficient profit-generating measure of a company’s future earnings. Depending on how much of these profits the company reinvests or ‘retains’, and how effectively it does so, we can assess a company’s earnings growth potential. All other things being equal, companies with a high return on equity and profit retention tend to have a higher growth rate than companies that don’t share these characteristics.
Beta Systems Software earnings growth and 31% ROE
First of all, we like that Beta Systems Software has an impressive ROE. Secondly, even compared to the industry average of 18%, the company’s ROE is quite impressive. This likely laid the foundation for Beta Systems Software’s moderate 19% net income growth over the past five years.
We then compared Beta Systems Software’s net revenue growth against the industry and we are pleased to see that the company’s growth rate is higher compared to the industry, which had a growth rate of 15% over the same five-year period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to determine whether the expected growth or decline in earnings, either way, is priced in. By doing this, they can determine whether the stock’s future looks promising or ominous. Is Beta Systems Software fairly valued compared to other companies? These 3 valuation measures can help you decide.
Does Beta System Software Use Profits Efficiently?
While the company has paid out some of its dividends in the past, it currently pays no dividends. We conclude that the company has reinvested all its profits to grow its business.
Overall, we are quite satisfied with Beta Systems Software’s performance. It’s especially great to see that the company is investing heavily in its operations and that, combined with high returns, has resulted in significant earnings growth. If the company continues to grow its earnings the same way it is now, that could have a positive impact on the stock price, given how earnings per share influence stock prices over the long term. Remember that stock price performance also depends on the potential risks a company may face. So it is important that investors are aware of the risks associated with the company. Our risk dashboard contains the 1 risk we have identified for Beta Systems Software.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.