Are Petco Health and Wellness Company, Inc.'s (NASDAQ:WOOF) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
With its stock down 27% over the past three months, it is easy to disregard Petco Health and Wellness Company (NASDAQ:WOOF). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Petco Health and Wellness Company's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Petco Health and Wellness Company
How Do You Calculate Return On Equity?
ROE 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 Petco Health and Wellness Company is:
5.1% = US$116m ÷ US$2.3b (Based on the trailing twelve months to July 2022).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.05 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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 Petco Health and Wellness Company's Earnings Growth And 5.1% ROE
At first glance, Petco Health and Wellness Company's ROE doesn't look very promising. Next, when compared to the average industry ROE of 30%, the company's ROE leaves us feeling even less enthusiastic. However, we we're pleasantly surprised to see that Petco Health and Wellness Company grew its net income at a significant rate of 130% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Petco Health and Wellness Company's growth is quite high when compared to the industry average growth of 31% in the same period, which is great to see.
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. Doing so will help them establish if the stock's future looks promising or ominous. 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 Petco Health and Wellness Company is trading on a high P/E or a low P/E, relative to its industry.
Is Petco Health and Wellness Company Using Its Retained Earnings Effectively?
Petco Health and Wellness Company doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.
Summary
On the whole, we do feel that Petco Health and Wellness Company has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
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