Shoe Carnival ( NASDAQ:SCVL ) has had a rough three months with its stock price down 19%. However, share prices are usually driven by a company’s long-term financial performance, which in this case looks quite promising. Specifically, we decided to study Shoe Carnival’s ROE in this article.
Return on equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures a company’s profitability relative to shareholders’ equity.
Check out our latest Shoe Carnival analysis
How is ROE calculated?
of capital return formula is:
Return on equity = Net profit (from continuing operations) ÷ Shareholders’ equity
So, based on the formula above, the ROE for Shoe Carnival is:
30% = $139 million ÷ $456 million (Based on trailing twelve months to April 2022).
‘Return’ is the annual profit. This means that for every $1 of equity, the company generated $0.30 in profit.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an efficient profit-generating measure of a company’s future earnings. Based on how much of its earnings the company chooses to reinvest or “hold,” we are then able to estimate a company’s future ability to generate earnings. Assuming all else is equal, companies that have a higher return on equity and higher earnings retention are usually those that have a higher growth rate when compared to companies that do not have the same characteristics.
Increased shoe carnival profits and 30% ROE
First things first, we love that Shoe Carnival has an impressive ROE. Even when compared to the industry average of 32%, the company’s ROE is quite good. As a result, Shoe Carnival’s remarkable 42% net income growth over the past 5 years was likely helped by its high ROE.
We then compared Shoe Carnival’s net income growth to the industry and are pleased to see that the company’s growth figure is higher when compared to the industry which has a growth rate of 31% over the same period.
Earnings growth is a big factor in stock valuation. The investor should try to determine whether the expected increase or decrease in earnings, whichever the case may be, has a price. This then helps them determine whether the stock is set for a bright or bleak future. A 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 might want to check whether Shoe Carnival is trading at a high P/E or a low P/E, relative to its industry.
Does Shoe Carnival effectively use retained earnings?
Shoe Carnival’s three-year average payout ratio is on the lower side at 12%, meaning it is retaining a higher percentage (88%) of its earnings. So it seems that Shoe Carnival is reinvesting a lot of profits to grow its business, which shows its earnings growth.
In addition, Shoe Carnival has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
summary
Overall, we are quite pleased with the performance of Shoe Carnival. In particular, we like that the company is reinvesting a large portion of its earnings at a high rate of return. This has certainly caused the company to see significant growth in its revenue. If the company continues to grow its earnings as it has, this could have a positive impact on its share price given how earnings per share affect long-term share prices. Remember, the price of a stock also depends on the perceived risk. Investors should therefore be informed of the risks involved before investing in any company. Our risk panel will have risk 1 that we have identified for Shoe Carnival.
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This article from 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 into account your financial objectives or situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not include the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in any of the stocks mentioned.
