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Cracker Barrel Old Country Store, Inc.'s (NASDAQ:CBRL) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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Cracker Barrel Old Country Store (NASDAQ:CBRL) has had a rough three months with its share price down 17%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Cracker Barrel Old Country Store's ROE in this article.

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.

See our latest analysis for Cracker Barrel Old Country Store

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Cracker Barrel Old Country Store is:

38% = US$243m ÷ US$648m (Based on the trailing twelve months to April 2021).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.38 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Cracker Barrel Old Country Store's Earnings Growth And 38% ROE

Firstly, we acknowledge that Cracker Barrel Old Country Store has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. For this reason, Cracker Barrel Old Country Store's five year net income decline of 12% raises the question as to why the high ROE didn't translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.

As a next step, we compared Cracker Barrel Old Country Store's performance with the industry and found thatCracker Barrel Old Country Store's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 5.8% in the same period, which is a slower than the company.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for CBRL? You can find out in our latest intrinsic value infographic research report.

Is Cracker Barrel Old Country Store Using Its Retained Earnings Effectively?

Cracker Barrel Old Country Store has a high three-year median payout ratio of 55% (that is, it is retaining 45% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 5 risks we have identified for Cracker Barrel Old Country Store visit our risks dashboard for free.

In addition, Cracker Barrel Old Country Store has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 51%. Regardless, Cracker Barrel Old Country Store's ROE is speculated to decline to 30% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we do feel that Cracker Barrel Old Country Store has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. That being so, the latest industry analyst forecasts show that analysts are forecasting a slight improvement in the company's future earnings growth. The company's existing shareholders might have some respite after all. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

This article by Simply Wall St is general in nature. 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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