Is the recent stock performance of Levi Strauss & Co. (NYSE: LEVI) influenced by its fundamentals?

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Levi Strauss (NYSE: LEVI) stock rose 8.0% in the past month. As most know, fundamentals usually guide long-term market price movements, so we decided to look at the company’s key financial metrics today to determine if they have a role to play in the market. recent price movement. Specifically, we decided to study the ROE of Levi Strauss in this article.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for Levi Strauss

How to calculate return on equity?

The formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, Levi Strauss’s ROE is:

28% = US $ 457 million ÷ US $ 1.6 billion (based on the last twelve months to August 2021).

“Return” refers to a company’s profits over the past year. This means that for every dollar in shareholders’ equity, the company generated $ 0.28 in profit.

Why is ROE important for profit growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

Levi Strauss profit growth and 28% ROE

First of all, we love that Levi Strauss has an impressive ROE. Secondly, a comparison with the industry-reported average ROE of 16% doesn’t go unnoticed for us either. For this reason, Levi Strauss’ 12% drop in net profit over five years raises the question of why the high ROE did not translate into profit growth. So there could be other aspects that could explain this. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

Then, comparing with the growth in net income of the industry, we found that Levi Strauss’s revenue appears to be declining at a rate similar to that of the industry which has declined at a rate of 12% over the same period. period.

NYSE: LEVI Past Profit Growth November 23, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. A 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 outlook. So, you might want to check if Levi Strauss is trading high P / E or low P / E, relative to his industry.

Is Levi Strauss Using Retained Earnings Effectively?

Levi Strauss’ low three-year median payout ratio of 15% (which implies he keeps the remaining 85% of his profits) is surprising when you associate it with declining profits. This should generally not be the case when a business keeps most of its profits. So there could be other explanations in this regard. For example, the business of the company can deteriorate.

In addition, Levi Strauss only started paying a dividend recently. So it seems that management has perceived that shareholders favor dividends even though earnings are declining. Our latest analyst data shows that the company’s future payout ratio is expected to reach 21% over the next three years. However, the company’s ROE is not expected to change much despite the expected higher payout ratio.

Summary

Overall, we think Levi Strauss has some positive attributes. 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 prevent growth. That said, we have studied the latest analysts’ forecast and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 documents. Simply Wall St has no position in any of the stocks mentioned.

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