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Declining Stock and Solid Fundamentals: Is The Market Wrong About Columbia Sportswear Company (NASDAQ:COLM)?
Columbia Sportswear (NASDAQ:COLM) has had a rough three months with its share price down 5.2%. 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 Columbia Sportswear's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Columbia Sportswear
How Do You Calculate Return On Equity?
Return on equity 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 Columbia Sportswear is:
16% = US$292m ÷ US$1.9b (Based on the trailing twelve months to June 2023).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.16.
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. 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 Columbia Sportswear's Earnings Growth And 16% ROE
To start with, Columbia Sportswear's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 15%. This probably goes some way in explaining Columbia Sportswear's moderate 8.3% growth over the past five years amongst other factors.
Next, on comparing with the industry net income growth, we found that Columbia Sportswear's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is COLM fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Columbia Sportswear Using Its Retained Earnings Effectively?
Columbia Sportswear's three-year median payout ratio to shareholders is 22% (implying that it retains 78% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Moreover, Columbia Sportswear is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 22%. As a result, Columbia Sportswear's ROE is not expected to change by much either, which we inferred from the analyst estimate of 16% for future ROE.
Conclusion
On the whole, we feel that Columbia Sportswear's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.
