Is Academy Sports and Outdoors, Inc.'s (NASDAQ:ASO) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Academy Sports and Outdoors' (NASDAQ:ASO) stock is up by a considerable 51% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Academy Sports and Outdoors' ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Academy Sports and Outdoors
How To 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 Academy Sports and Outdoors is:
42% = US$643m ÷ US$1.5b (Based on the trailing twelve months to April 2022).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.42.
What Is The Relationship Between ROE And 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.
A Side By Side comparison of Academy Sports and Outdoors' Earnings Growth And 42% ROE
First thing first, we like that Academy Sports and Outdoors has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 31% which is quite remarkable. So, the substantial 53% net income growth seen by Academy Sports and Outdoors over the past five years isn't overly surprising.
As a next step, we compared Academy Sports and Outdoors' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 31%.
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. 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 Academy Sports and Outdoors is trading on a high P/E or a low P/E, relative to its industry.
Is Academy Sports and Outdoors Efficiently Re-investing Its Profits?
Academy Sports and Outdoors' ' three-year median payout ratio is on the lower side at 1.6% implying that it is retaining a higher percentage (98%) of its profits. So it looks like Academy Sports and Outdoors is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Our latest analyst data shows that the future payout ratio of the company is expected to rise to 2.7% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 29%) over the same period.
Conclusion
Overall, we are quite pleased with Academy Sports and Outdoors' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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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