Is SiteOne Landscape Supply, Inc.’s (NYSE: SITE) latest market performance a reflection of its financial health?
SiteOne Landscape Supply (NYSE: SITE) has had an excellent performance in the equity market with a significant increase in its stock of 19% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In this article, we have decided to focus on the ROE of SiteOne Landscape Supply.
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 review for SiteOne Landscape Supply
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of SiteOne Landscape Supply is:
20% = US $ 191 million Ã· US $ 937 million (based on the last twelve months to July 2021).
“Return” refers to a company’s profits over the past year. This means that for every dollar in shareholders’ equity, the company generated $ 0.20 in profit.
What does ROE have to do with 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. 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.
SiteOne Landscape Supply profit growth and 20% ROE
For starters, SiteOne Landscape Supply’s ROE seems acceptable. Especially compared to the industry average of 16%, the company’s ROE looks pretty impressive. It is probably because of this that SiteOne Landscape Supply has been able to record an impressive 54% net income growth over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
Then, comparing with the growth in net income of the industry, we found that the growth of SiteOne Landscape Supply is quite high compared to the industry average growth of 13% over the same period, which is great to see.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. 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. Is SiteOne Landscape Supply fair valued over other companies? These 3 evaluation measures could help you decide.
Is SiteOne Landscape Supply Efficiently Using Its Profits?
SiteOne Landscape Supply does not pay any dividends to its shareholders, which means the company has reinvested all of its profits back into the business. This is probably what explains the high number of profit growth discussed above.
Overall, we are quite satisfied with the performance of SiteOne Landscape Supply. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. Unsurprisingly, this led to impressive profit growth. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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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