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Is Young & Co.'s Brewery, P.L.C.'s (LON:YNGA) Recent Price Movement Underpinned By Its Weak Fundamentals?

With its stock down 4.5% over the past three months, it is easy to disregard Young's Brewery (LON:YNGA). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Young's Brewery's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Young's Brewery

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Young's Brewery is:

3.8% = UK£28m ÷ UK£731m (Based on the trailing twelve months to October 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.04 in profit.

Why Is ROE Important For 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.

Young's Brewery's Earnings Growth And 3.8% ROE

At first glance, Young's Brewery's ROE doesn't look very promising. Next, when compared to the average industry ROE of 8.0%, the company's ROE leaves us feeling even less enthusiastic. Therefore, Young's Brewery's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Young's Brewery's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 1.3% in the same 5-year period, which is a bit concerning.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Young's Brewery is trading on a high P/E or a low P/E, relative to its industry.

Is Young's Brewery Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 39% (meaning the company retains61% of profits) in the last three-year period, Young's Brewery's earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Young's Brewery 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%.

Summary

On the whole, we feel that the performance shown by Young's Brewery can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.