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Should Woolworths Group Limited's (ASX:WOW) Recent Earnings Decline Worry You?

Simply Wall St

Measuring Woolworths Group Limited's (ASX:WOW) track record of past performance is an insightful exercise for investors. It enables us to reflect on whether the company has met or exceed expectations, which is a powerful signal for future performance. Below, I will assess WOW's recent performance announced on 30 June 2019 and compare these figures to its historical trend and industry movements.

See our latest analysis for Woolworths Group

Was WOW's recent earnings decline indicative of a tough track record?

WOW's trailing twelve-month earnings (from 30 June 2019) of AU$1.5b has declined by -7.0% compared to the previous year.

Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -14%, indicating the rate at which WOW is growing has slowed down. Why could this be happening? Well, let's look at what's going on with margins and whether the entire industry is experiencing the hit as well.

ASX:WOW Income Statement, December 8th 2019

In terms of returns from investment, Woolworths Group has fallen short of achieving a 20% return on equity (ROE), recording 15% instead. However, its return on assets (ROA) of 6.9% exceeds the AU Consumer Retailing industry of 4.2%, indicating Woolworths Group has used its assets more efficiently. And finally, its return on capital (ROC), which also accounts for Woolworths Group’s debt level, has increased over the past 3 years from 10% to 18%. This correlates with a decrease in debt holding, with debt-to-equity ratio declining from 41% to 29% over the past 5 years.

What does this mean?

While past data is useful, it doesn’t tell the whole story. Generally companies that endure a drawn out period of decline in earnings are undergoing some sort of reinvestment phase Although, if the entire industry is struggling to grow over time, it may be a signal of a structural change, which makes Woolworths Group and its peers a higher risk investment. I suggest you continue to research Woolworths Group to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for WOW’s future growth? Take a look at our free research report of analyst consensus for WOW’s outlook.
  2. Financial Health: Are WOW’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures.

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.