It is hard to get excited after looking at Acushnet Holdings' (NYSE:GOLF) recent performance, when its stock has declined 5.8% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Acushnet Holdings' ROE.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Acushnet Holdings is:
21% = US$223m ÷ US$1.1b (Based on the trailing twelve months to June 2023).
The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.21 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Acushnet Holdings' Earnings Growth And 21% ROE
At first glance, Acushnet Holdings seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 12%. Probably as a result of this, Acushnet Holdings was able to see a decent growth of 19% over the last five years.
Next, on comparing Acushnet Holdings' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 22% over the last few years.
Earnings growth is a huge factor in stock valuation. 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. What is GOLF worth today? The intrinsic value infographic in our free research report helps visualize whether GOLF is currently mispriced by the market.
Is Acushnet Holdings Efficiently Re-investing Its Profits?
Acushnet Holdings has a healthy combination of a moderate three-year median payout ratio of 28% (or a retention ratio of 72%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Acushnet Holdings has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 25%. As a result, Acushnet Holdings' ROE is not expected to change by much either, which we inferred from the analyst estimate of 23% for future ROE.
In total, we are pretty happy with Acushnet Holdings' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.