Yahoo Finance Sportsman's Warehouse Holdings, Inc.'s (NASDAQ:SPWH) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
Sportsman's Warehouse Holdings (NASDAQ:SPWH) has had a rough month with its share price down 4.9%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Sportsman's Warehouse Holdings' ROE today.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Sportsman's Warehouse Holdings
How Do You Calculate Return On Equity?
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 Sportsman's Warehouse Holdings is:
31% = US$88m ÷ US$283m (Based on the trailing twelve months to October 2022).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.31 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Sportsman's Warehouse Holdings' Earnings Growth And 31% ROE
To begin with, Sportsman's Warehouse Holdings has a pretty high ROE which is interesting. Further, even comparing with the industry average if 29%, the company's ROE is quite respectable. Given the circumstances, the significant 40% net income growth seen by Sportsman's Warehouse Holdings over the last five years is not surprising.
Next, on comparing Sportsman's Warehouse Holdings' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 34% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Is Sportsman's Warehouse Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Sportsman's Warehouse Holdings Making Efficient Use Of Its Profits?
Sportsman's Warehouse Holdings 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
In total, we are pretty happy with Sportsman's Warehouse Holdings' performance. 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. That being so, according to the latest industry analyst forecasts, the company's earnings are expected 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
