Most readers would already be aware that Winnebago Industries' (NYSE:WGO) stock increased significantly by 27% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Winnebago Industries' ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Is ROE Calculated?
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 Winnebago Industries is:
31% = US$392m ÷ US$1.3b (Based on the trailing twelve months to May 2022).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.31 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. 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.
Winnebago Industries' Earnings Growth And 31% ROE
Firstly, we acknowledge that Winnebago Industries has a significantly high ROE. Secondly, even when compared to the industry average of 26% the company's ROE is quite impressive. As a result, Winnebago Industries' exceptional 35% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Winnebago Industries' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 20%.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is WGO worth today? The intrinsic value infographic in our free research report helps visualize whether WGO is currently mispriced by the market.
Is Winnebago Industries Efficiently Re-investing Its Profits?
Winnebago Industries' ' three-year median payout ratio is on the lower side at 11% implying that it is retaining a higher percentage (89%) of its profits. So it looks like Winnebago Industries is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Besides, Winnebago Industries has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. 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 10%. Regardless, Winnebago Industries' ROE is speculated to decline to 16% despite there being no anticipated change in its payout ratio.
On the whole, we feel that Winnebago Industries' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here