FIGS, Inc.'s (NYSE:FIGS) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?
Most readers would already be aware that FIGS' (NYSE:FIGS) stock increased significantly by 15% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to FIGS' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for FIGS
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 FIGS is:
4.4% = US$14m ÷ US$320m (Based on the trailing twelve months to March 2023).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.04 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of FIGS' Earnings Growth And 4.4% ROE
When you first look at it, FIGS' ROE doesn't look that attractive. Next, when compared to the average industry ROE of 16%, the company's ROE leaves us feeling even less enthusiastic. Hence, the flat earnings seen by FIGS over the past five years could probably be the result of it having a lower ROE.
As a next step, we compared FIGS' net income growth with the industry and discovered that the industry saw an average growth of 14% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is FIGS worth today? The intrinsic value infographic in our free research report helps visualize whether FIGS is currently mispriced by the market.
Is FIGS Making Efficient Use Of Its Profits?
FIGS doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Summary
On the whole, we feel that the performance shown by FIGS can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.
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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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