Yahoo Finance Will Weakness in DICK'S Sporting Goods, Inc.'s (NYSE:DKS) Stock Prove Temporary Given Strong Fundamentals?
It is hard to get excited after looking at DICK'S Sporting Goods' (NYSE:DKS) recent performance, when its stock has declined 6.5% over the past week. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study DICK'S Sporting Goods' ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for DICK'S Sporting Goods
How Is ROE Calculated?
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 DICK'S Sporting Goods is:
38% = US$1.0b ÷ US$2.7b (Based on the trailing twelve months to May 2024).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.38 in profit.
What Has ROE Got To Do With 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. 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.
DICK'S Sporting Goods' Earnings Growth And 38% ROE
Firstly, we acknowledge that DICK'S Sporting Goods has a significantly high ROE. Secondly, even when compared to the industry average of 19% the company's ROE is quite impressive. As a result, DICK'S Sporting Goods' exceptional 25% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing DICK'S Sporting Goods' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is DKS fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is DICK'S Sporting Goods Making Efficient Use Of Its Profits?
DICK'S Sporting Goods' three-year median payout ratio to shareholders is 14%, which is quite low. This implies that the company is retaining 86% of its profits. So it looks like DICK'S Sporting Goods is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, DICK'S Sporting Goods is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 34% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.
Summary
On the whole, we feel that DICK'S Sporting Goods' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
