Yahoo Finance Is Natural Grocers by Vitamin Cottage, Inc.'s (NYSE:NGVC) Latest Stock Performance A Reflection Of Its Financial Health?
Most readers would already be aware that Natural Grocers by Vitamin Cottage's (NYSE:NGVC) stock increased significantly by 19% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Natural Grocers by Vitamin Cottage's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Natural Grocers by Vitamin Cottage
How To Calculate Return On Equity?
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 Natural Grocers by Vitamin Cottage is:
12% = US$17m ÷ US$137m (Based on the trailing twelve months to June 2021).
The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.12.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
Natural Grocers by Vitamin Cottage's Earnings Growth And 12% ROE
At first glance, Natural Grocers by Vitamin Cottage seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 11%. This certainly adds some context to Natural Grocers by Vitamin Cottage's moderate 15% net income growth seen over the past five years.
As a next step, we compared Natural Grocers by Vitamin Cottage's 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 7.9%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Natural Grocers by Vitamin Cottage is trading on a high P/E or a low P/E, relative to its industry.
Is Natural Grocers by Vitamin Cottage Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 29% (implying that the company retains 71% of its profits), it seems that Natural Grocers by Vitamin Cottage is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
While Natural Grocers by Vitamin Cottage has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.
Summary
On the whole, we feel that Natural Grocers by Vitamin Cottage's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 1 risk we have identified for Natural Grocers by Vitamin Cottage by visiting our risks dashboard for free on our platform here.
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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