Ark Restaurants Corp.'s (NASDAQ:ARKR) Stock Has Fared Decently: Is the Market Following Strong Financials?
Ark Restaurants' (NASDAQ:ARKR) stock up by 4.8% over the past week. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to Ark Restaurants' ROE today.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Ark Restaurants
How To 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 Ark Restaurants is:
28% = US$17m ÷ US$59m (Based on the trailing twelve months to July 2022).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.28 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Ark Restaurants' Earnings Growth And 28% ROE
To begin with, Ark Restaurants has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 23% which is quite remarkable. As a result, Ark Restaurants' exceptional 22% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing with the industry net income growth, we found that Ark Restaurants' growth is quite high when compared to the industry average growth of 5.6% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. 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 Ark Restaurants is trading on a high P/E or a low P/E, relative to its industry.
Is Ark Restaurants Efficiently Re-investing Its Profits?
Ark Restaurants has a really low LTM (or last twelve month) payout ratio of 2.9%, meaning that it has the remaining 97% left over to reinvest into its business. So it looks like Ark Restaurants is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Besides, Ark Restaurants 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
On the whole, we feel that Ark Restaurants' performance has been quite good. 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 3 risks we have identified for Ark Restaurants visit our risks dashboard for free.
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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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