Most readers already know that shares of Grocery Outlet Holding (NASDAQ: GO) have risen significantly 15% over the past month. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. Specifically, we decided to study the ROE of Grocery Outlet Holding in this article.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how effectively their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for Grocery Outlet Holding
How to calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Grocery Outlet Holding is:
8.0% = US $ 80 million Ã· US $ 994 million (based on the last twelve months to October 2021).
“Return” refers to a company’s profits over the past year. Another way to think about this is that for every dollar of equity, the company was able to make $ 0.08 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion 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 other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Grocery Outlet Holding profit growth and 8.0% ROE
At first glance, the ROE of Grocery Outlet Holding isn’t much to say. Still, further study shows that the company’s ROE is similar to the industry average of 9.8%. Looking in particular at Grocery Outlet Holding’s exceptional five-year net profit growth of 52% over five years, we are truly impressed. Given the slightly low ROE, it is likely that other aspects are behind this growth. Such as – high profit retention or effective management in place.
In the next step, we compared the net income growth of Grocery Outlet Holding with the industry and luckily we found that the growth observed by the company is above the average industry growth of 7, 6%.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. Has the market assessed GO’s future prospects? You can find out in our latest Intrinsic Value infographic research report.
Is Grocery Outlet Holding Efficiently Reinvesting Its Profits?
Since Grocery Outlet Holding does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to develop its business.
Overall, we think Grocery Outlet Holding definitely has some positive factors to consider. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. To learn more about the company’s future earnings growth forecast, take a look at 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 using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.