Yahoo Finance Are Strong Financial Prospects The Force That Is Driving The Momentum In Cal-Maine Foods, Inc.'s NASDAQ:CALM) Stock?
Cal-Maine Foods (NASDAQ:CALM) has had a great run on the share market with its stock up by a significant 9.3% over the last 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 Cal-Maine Foods' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Cal-Maine Foods
How Do You Calculate Return On Equity?
Return on equity 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 Cal-Maine Foods is:
12% = US$132m ÷ US$1.1b (Based on the trailing twelve months to May 2022).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.12 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Cal-Maine Foods' Earnings Growth And 12% ROE
At first glance, Cal-Maine Foods seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. This probably goes some way in explaining Cal-Maine Foods' moderate 6.9% growth over the past five years amongst other factors.
We then compared Cal-Maine Foods' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 3.7% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Cal-Maine Foods fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Cal-Maine Foods Making Efficient Use Of Its Profits?
In Cal-Maine Foods' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 2.5% (or a retention ratio of 98%), which suggests that the company is investing most of its profits to grow its business.
Additionally, Cal-Maine Foods 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 15% over the next three years.
Summary
Overall, we are quite pleased with Cal-Maine Foods' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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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