Is the recent performance of Hawkins, Inc. (NASDAQ:HWKN) shares related to its strong fundamentals?

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Hawkins Inc (NASDAQ:HWKN) has had a strong run in the stock market with a significant 8.4% rise in its shares over the past week. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. Specifically, we decided to study Hawkins ROE in this article.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for Hawkins

How is ROE calculated?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Hawkins is:

17% = $50 million ÷ $292 million (based on trailing 12 months to December 2021).

“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.17.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with a high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Hawkins earnings growth and ROE of 17%

For starters, Hawkins seems to have a respectable ROE. Compared to the industry average ROE of 14%, the company’s ROE looks quite remarkable. Probably because of this, Hawkins has been able to see impressive net income growth of 27% over the past five years. We believe that there could also be other aspects that positively influence the company’s earnings growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

We then compared Hawkins’ net income growth with the industry and we are pleased to see that the company’s growth figure is higher compared to the industry which has a growth rate of 6.1% during the same period.

NasdaqGS:HWKN Past Earnings Growth February 5, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Is Hawkins valued enough compared to other companies? These 3 assessment metrics might help you decide.

Is Hawkins effectively using its retained earnings?

Hawkins has a three-year median payout ratio of 29% (where it keeps 71% of its earnings), which is neither too low nor too high. So it looks like Hawkins is effectively reinvesting to see impressive earnings growth (discussed above) and paying out a well-covered dividend.

Additionally, Hawkins has paid dividends over a period of at least ten years, which means the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we think Hawkins’ performance was pretty good. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. That said, in studying the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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