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Is Brembo S.p.A.’s (BIT:BRE) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

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Brembo (BIT:BRE) has had a great run on the share market with its stock up by a significant 14% over the last three months. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Brembo’s ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

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How To Calculate Return On Equity?

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 Brembo is:

15% = €283m ÷ €1.9b (Based on the trailing twelve months to September 2022).

The ‘return’ is the income the business earned over the last year. So, this means that for every €1 of its shareholder’s investments, the company generates a profit of €0.15.

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. 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. 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.

Brembo’s Earnings Growth And 15% ROE

At first glance, Brembo seems to have a decent ROE. On comparing with the average industry ROE of 7.0% the company’s ROE looks pretty remarkable. As you might expect, the 3.7% net income decline reported by Brembo is a bit of a surprise. We reckon that there could be some other factors at play here that are preventing the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 0.3% in the same period, we found that Brembo’s performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

past-earnings-growth
BIT:BRE Past Earnings Growth November 24th 2022

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Brembo fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Brembo Making Efficient Use Of Its Profits?

Looking at its three-year median payout ratio of 37% (or a retention ratio of 63%) which is pretty normal, Brembo’s declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Brembo has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 14%.

Conclusion

Overall, we feel that Brembo certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that’s preventing growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. 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.

Valuation is complex, but we’re helping make it simple.

Find out whether Brembo is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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