Yahoo Finance Will Weakness in Big 5 Sporting Goods Corporation's (NASDAQ:BGFV) Stock Prove Temporary Given Strong Fundamentals?
It is hard to get excited after looking at Big 5 Sporting Goods' (NASDAQ:BGFV) recent performance, when its stock has declined 22% over the past month. 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. In this article, we decided to focus on Big 5 Sporting Goods' ROE.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Big 5 Sporting Goods
How To 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 Big 5 Sporting Goods is:
38% = US$102m ÷ US$267m (Based on the trailing twelve months to January 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.38 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Big 5 Sporting Goods' Earnings Growth And 38% ROE
Firstly, we acknowledge that Big 5 Sporting Goods has a significantly high ROE. Further, even comparing with the industry average if 32%, the company's ROE is quite respectable. As a result, Big 5 Sporting Goods' remarkable 58% net income growth seen over the past 5 years is likely aided by its high ROE.
Next, on comparing with the industry net income growth, we found that Big 5 Sporting Goods' growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Big 5 Sporting Goods''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Big 5 Sporting Goods Efficiently Re-investing Its Profits?
Big 5 Sporting Goods has a really low three-year median payout ratio of 13%, meaning that it has the remaining 87% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Additionally, Big 5 Sporting Goods 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.
Summary
Overall, we are quite pleased with Big 5 Sporting Goods' performance. 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. 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 3 risks we have identified for Big 5 Sporting Goods 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.
