Yahoo Finance Are Strong Financial Prospects The Force That Is Driving The Momentum In Build-A-Bear Workshop, Inc.'s NYSE:BBW) Stock?
Build-A-Bear Workshop (NYSE:BBW) has had a great run on the share market with its stock up by a significant 7.1% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Build-A-Bear Workshop's ROE today.
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 Build-A-Bear Workshop
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 Build-A-Bear Workshop is:
52% = US$51m ÷ US$99m (Based on the trailing twelve months to April 2022).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.52 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Build-A-Bear Workshop's Earnings Growth And 52% ROE
First thing first, we like that Build-A-Bear Workshop has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 32% also doesn't go unnoticed by us. So, the substantial 34% net income growth seen by Build-A-Bear Workshop over the past five years isn't overly surprising.
We then performed a comparison between Build-A-Bear Workshop's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 31% in the same period.
Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Build-A-Bear Workshop's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Build-A-Bear Workshop Efficiently Re-investing Its Profits?
Build-A-Bear Workshop doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.
Conclusion
In total, we are pretty happy with Build-A-Bear Workshop's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 2 risks we have identified for Build-A-Bear Workshop visit our risks dashboard for free.
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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.
