It’s hard to get excited after watching the recent performance of Bassett Furniture Industries (NASDAQ:BSET), as its stock is down 7.5% in the past three months. However, the company’s fundamentals look pretty decent and long-term financial data is generally in line with future market price movements. In this article, we decided to focus on the ROE of Bassett Furniture Industries.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
How to calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Bassett Furniture Industries is:
12% = $20 million ÷ $159 million (based on trailing 12 months to August 2021).
The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.12.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Bassett Furniture Industries earnings growth and 12% ROE
For starters, Bassett Furniture Industries seems to have a respectable ROE. Regardless, the company’s ROE is still well below the industry average of 19%. Additionally, Bassett Furniture Industries’ net income has declined 36% over the past five years. Keep in mind that the company has a high ROE. It’s just that the industry’s ROE is higher. Therefore, there could be other aspects that result in less revenue. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.
That being said, we compared the performance of Bassett Furniture Industries with that of the industry and became concerned when we found that while the company had reduced profits, the industry had increased profits at a rate of 21 % over the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. Is BSET correctly valued? This business intrinsic value infographic has everything you need to know.
Is Bassett Furniture Industries effectively using its retained earnings?
When we piece together Bassett Furniture Industries’ low three-year median payout ratio of 1.8% (where it retains 98% of its earnings), calculated for the last three-year period, we are puzzled by the lack of growth. This should generally not be the case when a company retains most of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.
Additionally, Bassett Furniture Industries has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to reach 26% over the next three years. However, the company’s ROE is not expected to change much despite the higher expected payout ratio.
Overall, we think Bassett Furniture Industries certainly has positive factors to consider. However, we are disappointed to see a lack of earnings growth, even despite a moderate ROE and high reinvestment rate. We believe there could be external factors that could negatively impact the business. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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