The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on 1-800-FLOWERSCOM Inc (NASDAQ:FLWS) stock.
1-800-FLOWERSCOM Inc (NASDAQ:FLWS) outperformed the Internet and Direct Marketing Retail industry on the basis of its ROE – producing a higher 17.69% relative to the peer average of 16.36% over the past 12 months. While the impressive ratio tells us that FLWS has made significant profits from little equity capital, ROE doesn’t tell us if FLWS has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable FLWS’s ROE is. View out our latest analysis for 1-800-FLOWERS.COM
Peeling the layers of ROE – trisecting a company’s profitability
Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of 1-800-FLOWERS.COM’s equity capital deployed. Its cost of equity is 13.57%. Given a positive discrepancy of 4.12% between return and cost, this indicates that 1-800-FLOWERS.COM pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be dissected into three distinct ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue 1-800-FLOWERS.COM can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be inflated by excessive debt, we need to examine 1-800-FLOWERS.COM’s debt-to-equity level. The debt-to-equity ratio currently stands at a low 32.34%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. 1-800-FLOWERS.COM exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For 1-800-FLOWERS.COM, I’ve compiled three key aspects you should further research:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is 1-800-FLOWERS.COM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1-800-FLOWERS.COM is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of 1-800-FLOWERS.COM? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.