The Woolworths Group (ASX:WOW) share price has increased by 3.7% over the past three months. As most people know, long-term fundamentals have a strong correlation with market price movements, so today we'll take a look at the company's key financial metrics and see if they play any role in the recent price movement. I decided to decide whether it was working or not. Specifically, we decided to examine Woolworths Group's ROE in this article.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. In other words, this reveals that the company has been successful in turning shareholder investments into profits.
Check out our latest analysis for Woolworths Group.
How do you calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Woolworths Group's ROE is:
25% = AUD 1.6 billion ÷ AUD 6.6 billion (based on the trailing twelve months to June 2023).
“Return” is the annual profit. One way he conceptualizes this is that for every A$1 of shareholders' equity, the company earned him A$0.25 of profit.
What relationship does ROE have with profit growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
Woolworths Group's earnings growth and ROE of 25%
First of all, we like that Woolworths Group has a good ROE. Moreover, his ROE for the company is respectable even when compared to the industry average of 24%. Given this situation, one can't help but wonder why Woolworths Group has grown so little over the past five years. We think there may be other factors at play here that are limiting the company's growth. For example, if a company pays out a large portion of its earnings as dividends or if it faces competitive pressures.
Next, when compared to the industry's net income growth, we find that Woolworths Group's reported growth rate is lower than the industry's growth rate of 19% over the past few years. This is what we don't want to see.
Earnings growth is an important metric to consider when evaluating a stock. Investors should check whether expected earnings growth or decline has been factored in in any case. By doing so, you can find out if the stock is headed for clear blue waters or if a swamp awaits. Is the market factoring in WOW's future prospects? Find out in our latest Intrinsic Value infographic research report.
Is Woolworths Group using its profits efficiently?
Woolworths Group's median three-year dividend payout ratio is a high 85% (or a retention rate of 15%), meaning the company pays out most of its profits to shareholders as dividends. This may go some way to explaining why earnings haven't grown.
Additionally, Woolworths Group has been paying dividends for at least 10 years. This means the company's management is determined to pay a dividend, even if earnings growth means little. Based on the latest analyst forecasts, the company's future dividend payout ratio over the next three years is expected to remain stable at 74%. As a result, Woolworths Group's ROE is not expected to change significantly, based on analysts' future ROE expectations of 26%.
conclusion
Overall, we feel Woolworths Group has some positive attributes. However, although the company has a high ROE, its profit growth rate is very disappointing. This is likely because it only reinvests a small portion of its profits and pays out the rest as dividends. That said, the latest analyst forecasts suggest that the company's revenue will continue to grow. Are these analyst forecasts based on broader expectations for the industry, or are they based on the company's fundamentals? Click here to be taken to our analyst forecasts page for the company .
Have feedback on this article? Interested in its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
