SpartanNash Inc (NASDAQ:SPTN) stock is up 5.7% over the past week. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. Specifically, we decided to study SpartanNash’s 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 simple terms, it is used to assess the profitability of a company in relation to its equity.
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How is ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for SpartanNash is:
7.8% = $62 million ÷ $794 million (based on trailing 12 months to July 2022).
The “yield” is the profit of the last twelve months. So, this means that for every $1 of investment by its shareholder, the firm generates a profit of $0.08.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently 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 earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.
SpartanNash earnings growth and ROE of 7.8%
At first glance, SpartanNash’s ROE doesn’t have much to say. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 14%. However, we are pleasantly surprised to see that SpartanNash has grown its net profit at a significant rate of 42% over the past five years. We believe there could be other factors at play here. For example, the business has a low payout ratio or is efficiently managed.
Then comparing with the industry net income growth, we found that SpartanNash’s growth is quite high compared to the industry average growth of 15% over the same period, which is great have.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. Is the SPTN correctly valued? This intrinsic business value infographic has everything you need to know.
Does SpartanNash Use Retained Earnings Effectively?
The three-year median payout ratio for SpartanNash is 40%, which is moderately low. The company retains the remaining 60%. This suggests its dividend is well covered, and given the strong growth we discussed above, it looks like SpartanNash is reinvesting its earnings effectively.
Additionally, SpartanNash is committed to continuing to share its earnings with shareholders, which we infer from its long history of paying dividends for at least ten years. Existing analyst estimates suggest the company’s future payout ratio is likely to drop to 30% over the next three years. The fact that the company’s ROE is expected to increase to 9.8% over the same period is explained by the drop in the payout ratio.
Overall, we think SpartanNash has positive attributes. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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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