Simply Good Foods (NASDAQ:SMPL) has had a rough three months, with its share price down 14%. However, the company’s fundamentals look pretty good, and long-term financials usually guide future market price movements. We’ve decided to specifically examine Simply Good Foods’ return on equity in this article.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the return on the capital provided by the company’s shareholders.
Check out our latest analysis for Simply Good Foods
How do you calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
Based on the above formula, the ROE for Simply Good Foods is:
8.7% = $147 million ÷ $1.7 billion (based on the trailing twelve months ending May 2024).
The “return” is the amount earned after taxes over the last twelve months. You can also imagine it like this: for every dollar of equity, the company was able to make $0.09 in profit.
Why is return on equity (ROE) important for earnings growth?
So far we have learned that return on equity is a measure of a company’s profitability. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and profit retention will have a higher growth rate than companies that do not have these characteristics.
Simply Good Foods’ earnings growth and return on equity of 8.7%
At first glance, Simply Good Foods’ return on equity is not particularly impressive. However, a quick closer look shows that the company’s return on equity does not compare well even to the industry average of 13%. Despite this, Simply Good Foods has managed to grow its net income by 41% over the past five years. So there could be other aspects that are positively influencing the company’s earnings growth. For example, the company has a low payout ratio or is managed efficiently.
Next, when comparing it with the industry’s net income growth, we found that Simply Good Foods’ growth is quite high compared to the average industry growth of 9.5% over the same period, which is encouraging.
Earnings growth is an important factor in stock valuation. The investor should try to determine if the expected earnings growth or decline, whichever may be the case, is priced in. This will then help them determine if the stock is positioned for a good or bad future. What is SMPL worth today? The intrinsic value infographic in our free research report helps visualize if SMPL is currently mispriced by the market.
Does Simply Good Foods use its profits efficiently?
Simply Good Foods does not pay regular dividends to its shareholders, which means that the company has reinvested all of its profits into the business. This is likely the reason for the high earnings growth discussed above.
Diploma
Overall, we think Simply Good Foods does have some positives going for it. Despite the low ROE, the fact that the company reinvests a very high proportion of its profits into its business has undoubtedly contributed to its high earnings growth. However, the company’s earnings growth is expected to slow down as forecast by the latest analyst estimates. For more information on the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
