BJ’s Restaurants, Inc.’s (NASDAQ:BJRI) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

With its stock down 11% over the past three months, it is easy to disregard BJ’s Restaurants (NASDAQ:BJRI). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to BJ’s Restaurants’ ROE today.

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.

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How Do You Calculate Return On Equity?

ROE 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 BJ’s Restaurants is:

4.5% = US$17m ÷ US$370m (Based on the trailing twelve months to December 2024).

The ‘return’ refers to a company’s earnings over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.05.

Check out our latest analysis for BJ’s Restaurants

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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 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.

BJ’s Restaurants’ Earnings Growth And 4.5% ROE

As you can see, BJ’s Restaurants’ ROE looks pretty weak. Not just that, even compared to the industry average of 15%, the company’s ROE is entirely unremarkable. In spite of this, BJ’s Restaurants was able to grow its net income considerably, at a rate of 37% in the last five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing BJ’s Restaurants’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 33% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is BJRI worth today? The intrinsic value infographic in our free research report helps visualize whether BJRI is currently mispriced by the market.

Is BJ’s Restaurants Making Efficient Use Of Its Profits?

BJ’s Restaurants doesn’t pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

Overall, we feel that BJ’s Restaurants certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.