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Could The Market Be Wrong About Restaurant Brands New Zealand Limited (NZSE:RBD) Given Its Attractive Financial Prospects?

·4-min read

It is hard to get excited after looking at Restaurant Brands New Zealand's (NZSE:RBD) recent performance, when its stock has declined 23% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Restaurant Brands New Zealand's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Restaurant Brands New Zealand

How Do You 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 Restaurant Brands New Zealand is:

18% = NZ$52m ÷ NZ$290m (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Restaurant Brands New Zealand's Earnings Growth And 18% ROE

At first glance, Restaurant Brands New Zealand seems to have a decent ROE. Especially when compared to the industry average of 9.6% the company's ROE looks pretty impressive. This probably laid the ground for Restaurant Brands New Zealand's moderate 11% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Restaurant Brands New Zealand's growth is quite high when compared to the industry average growth of 3.3% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Restaurant Brands New Zealand is trading on a high P/E or a low P/E, relative to its industry.

Is Restaurant Brands New Zealand Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 77% (or a retention ratio of 23%) for Restaurant Brands New Zealand suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Restaurant Brands New Zealand is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, we are pretty happy with Restaurant Brands New Zealand's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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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