Hibbett stock (NASDAQ: HIBB) has risen 17% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In particular, we will be paying close attention to Hibbett’s ROE today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for Hibbett
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Hibbett is:
40% = US $ 174 million US $ 439 million (based on the last twelve months to May 2021).
The “return” is the annual profit. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.40 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Hibbett’s profit growth and 40% ROE
First of all, we love that Hibbett has an impressive ROE. Second, even compared to the industry average of 24%, the company’s ROE is quite impressive. Still, Hibbett has posted meager growth of 2.2% over the past five years. This is interesting because high returns should mean that the company has the capacity to generate high growth, but for some reason it hasn’t been able to. Some probable reasons why this could happen are that the company could have a high payout ratio or the company has misallocated capital, for example.
Then, comparing with the industry’s net income growth, we found that Hibbett’s reported growth was lower than the industry’s 8.0% growth over the same period, which is not something we like to see.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. If you’re wondering about Hibbett’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is Hibbett Using Retained Earnings Effectively?
Overall, we think Hibbett certainly has some positive factors to consider. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and is reinvesting a huge chunk of its earnings. At first glance, there could be other factors, which do not necessarily control the business, which are preventing growth. That said, studying the latest analysts’ forecast, we found that while the company has seen past earnings growth, analysts expect future earnings to decline. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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