Is the recent performance of Shoe Carnival, Inc. (NASDAQ: SCVL) stock being driven by its attractive financial outlook?

Shoe Carnival (NASDAQ: SCVL) shares have risen 17% in the past three months. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In particular, we’ll be paying special attention to Shoe Carnival’s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. 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 analysis for the shoe carnival

How to calculate return on equity?

Return on equity can be calculated using the formula:

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

So, based on the above formula, the ROE of the Shoe Carnival is:

33% = US $ 142 million ÷ US $ 433 million (based on the last twelve months to October 2021).

The “return” is the income the business has earned over the past year. This means that for every dollar in shareholders’ equity, the company generated $ 0.33 in profit.

What is the relationship between ROE and profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of ​​the growth potential of the business. 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.

A side-by-side comparison of Shoe Carnival’s 33% profit growth and ROE

For starters, Shoe Carnival has a pretty high ROE, which is interesting. Even compared to the industry average of 31%, the company’s ROE is pretty decent. Given the circumstances, the significant 30% net income growth observed by Shoe Carnival over the past five years is not surprising.

We then compared Shoe Carnival’s net income growth with the industry and we are happy to see that the company’s growth number is higher compared to the industry which has an 18% growth rate at during the same period.

NasdaqGS: SCVL Past profit growth on December 24, 2021

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. This then helps them determine whether the stock is set for a bright or dark future. 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 Shoe Carnival is trading high P / E or low P / E, relative to its industry.

Is the Shoe Carnival effectively reinvesting its profits?

Shoe Carnival has a very low three-year median payout rate of 12%, which means it has the remaining 88% to reinvest in its business. So it appears that management is reinvesting the profits massively to grow their business, which is reflected in their profit growth figure.

Additionally, Shoe Carnival has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders.

Summary

Overall, we are quite happy with the performance of Shoe Carnival. 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.

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 any stock 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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