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UniFirst Corporation's (NYSE:UNF) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Simply Wall St
·4 mins read

It is hard to get excited after looking at UniFirst's (NYSE:UNF) recent performance, when its stock has declined 18% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study UniFirst's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for UniFirst

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for UniFirst is:

10% = US$176m ÷ US$1.7b (Based on the trailing twelve months to February 2020).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.10.

Why Is ROE Important For Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. 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.

UniFirst's Earnings Growth And 10% ROE

To start with, UniFirst's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 12%. This certainly adds some context to UniFirst's moderate 9.9% net income growth seen over the past five years.

As a next step, we compared UniFirst's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.

NYSE:UNF Past Earnings Growth May 11th 2020
NYSE:UNF Past Earnings Growth May 11th 2020

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about UniFirst's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is UniFirst Making Efficient Use Of Its Profits?

In UniFirst's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 2.6% (or a retention ratio of 97%), which suggests that the company is investing most of its profits to grow its business.

Additionally, UniFirst has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that UniFirst's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.