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Is Bisalloy Steel Group Limited's (ASX:BIS) Stock's Recent Performance A Reflection Of Its Financial Health?

Bisalloy Steel Group's (ASX:BIS) stock up by 5.0% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Bisalloy Steel Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Bisalloy Steel Group

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 Bisalloy Steel Group is:

24% = AU$15m ÷ AU$64m (Based on the trailing twelve months to June 2022).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.24 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Bisalloy Steel Group's Earnings Growth And 24% ROE

To begin with, Bisalloy Steel Group has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. As a result, Bisalloy Steel Group's exceptional 38% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing Bisalloy Steel Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 33% in the same period.

past-earnings-growth
past-earnings-growth

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Bisalloy Steel Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Bisalloy Steel Group Making Efficient Use Of Its Profits?

The three-year median payout ratio for Bisalloy Steel Group is 47%, which is moderately low. The company is retaining the remaining 53%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Bisalloy Steel Group is reinvesting its earnings efficiently.

Besides, Bisalloy Steel Group has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Bisalloy Steel Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 3 risks we have identified for Bisalloy Steel Group by visiting our risks dashboard for free on our platform here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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