Yahoo Finance Are Robust Financials Driving The Recent Rally In Signet Jewelers Limited's (NYSE:SIG) Stock?
Signet Jewelers' (NYSE:SIG) stock is up by a considerable 13% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Signet Jewelers' ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Signet Jewelers
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Signet Jewelers is:
23% = US$469m ÷ US$2.0b (Based on the trailing twelve months to July 2022).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.23 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Signet Jewelers' Earnings Growth And 23% ROE
First thing first, we like that Signet Jewelers has an impressive ROE. On the other hand, the industry average is quite high at 29%, which tempers our excitement. However, we are pleased to see the impressive 28% net income growth reported by Signet Jewelers over the past five years. Therefore, there could be other factors driving this growth. Such as - high earnings retention or an efficient management in place. However, not to forget, the company does have a high ROE to begin with, just that it is lower than the industry average. So the high ROE levels also provide some context to the high earnings growth seen by the company.
As a next step, we compared Signet Jewelers' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 31% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is SIG fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Signet Jewelers Making Efficient Use Of Its Profits?
Signet Jewelers' ' three-year median payout ratio is on the lower side at 1.6% implying that it is retaining a higher percentage (98%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Additionally, Signet Jewelers has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 12% over the next three years. Still, forecasts suggest that Signet Jewelers' future ROE will rise to 31% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.
Summary
On the whole, we feel that Signet Jewelers' performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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