Woolworths Group Limited (ASX:WOW) On an uptrend: could fundamentals be driving the stock?
Shares of Woolworths Group (ASX:WOW) are up 4.6% over the past month. We wonder if and what role company finances play in this price change, as a company’s long-term fundamentals usually dictate market outcomes. In particular, we’ll be paying attention to Woolworths Group’s ROE today.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for Woolworths Group
How do you calculate return on equity?
the ROE formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Woolworths Group is:
25% = AU$1.4 billion ÷ AU$5.7 billion (based on trailing 12 months to January 2022).
The “yield” is the profit of the last twelve months. Another way to think about this is that for every 1 Australian dollar of equity, the company was able to make a profit of 0.25 Australian dollars.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Woolworths Group profit growth and 25% ROE
For starters, Woolworths Group has a pretty high ROE, which is interesting. Additionally, a comparison to the industry average ROE of 22% also paints a good picture of the company’s ROE. However, when you compare Woolworths Group’s high ROE with its rather stable earnings, you wonder what is causing the stunted growth? We believe there could be other factors at play here that limit the growth of the business. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.
From the 0.6% decline reported by the industry over the same period, we infer that the Woolworths Group and its industry are both contracting at a similar pace.
The basis for attaching value to a company is, to a large extent, linked 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. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. What is WOW worth today? The intrinsic value infographic in our free research report helps visualize if WOW is currently being mispriced by the market.
Does Woolworths Group use its retained earnings effectively?
With a high three-year median payout ratio of 89% (implying that the company retains only 11% of its revenue) from its business to reinvest in its business), most of Woolworths Group’s profits are returned to shareholders. , which explains the lack of revenue growth.
Additionally, Woolworths Group has paid dividends over a period of at least ten years, meaning the company’s management is committed to paying dividends even if it means little or no earnings growth. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 73%. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 26%.
Overall, we believe Woolworths Group has some positive attributes. However, we are disappointed to see a lack of earnings growth, even despite high ROE. Keep in mind that the company reinvests a small portion of its profits, which means that investors do not reap the benefits of the high rate of return. Additionally, after studying current analyst estimates, we have found that the company’s earnings are expected to continue to decline in the future. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.