Hibbett Sports, Inc.'s (NASDAQ:HIBB) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?
Hibbett Sports (NASDAQ:HIBB) has had a great run on the share market with its stock up by a significant 37% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Hibbett Sports' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Hibbett Sports
How To 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 Hibbett Sports is:
15% = US$56m ÷ US$373m (Based on the trailing twelve months to October 2020).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.15 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. 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. 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.
A Side By Side comparison of Hibbett Sports' Earnings Growth And 15% ROE
To start with, Hibbett Sports' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 18%. However, while Hibbett Sports has a pretty respectable ROE, its five year net income decline rate was 24% . So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.
However, when we compared Hibbett Sports' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 6.7% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hibbett Sports''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Hibbett Sports Using Its Retained Earnings Effectively?
Summary
Overall, we feel that Hibbett Sports certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow 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.
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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