Woolworths Group’s (ASX:WOW) stock is up by 3.7% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Woolworths Group’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.
See our latest analysis for Woolworths Group
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 Woolworths Group is:
25% = AU$1.6b ÷ AU$6.6b (Based on the trailing twelve months to June 2023).
The ‘return’ is the yearly profit. One way to conceptualize this is that for each A$1 of shareholders’ capital it has, the company made A$0.25 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. 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.
Woolworths Group’s Earnings Growth And 25% ROE
First thing first, we like that Woolworths Group has an impressive ROE. Further, even comparing with the industry average if 24%, the company’s ROE is quite respectable. Given the circumstances, we can’t help but wonder why Woolworths Group saw little to no growth in the past five years. We reckon that there could be some other factors at play here that’s limiting the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
Next, on comparing with the industry net income growth, we found that Woolworths Group’s reported growth was lower than the industry growth of 19% over the last few years, which is not something we like to see.
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. Has the market priced in the future outlook for WOW? You can find out in our latest intrinsic value infographic research report.
Is Woolworths Group Making Efficient Use Of Its Profits?
Woolworths Group has a high three-year median payout ratio of 85% (or a retention ratio of 15%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there’s been no growth in its earnings.
Additionally, Woolworths Group has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 74%. As a result, Woolworths Group’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 26% for future ROE.
Conclusion
On the whole, we do feel that Woolworths Group has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
Credit: Source link