With its stock down 9.2% over the past three months, it is easy to disregard DICK'S Sporting Goods (NYSE:DKS). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on DICK'S Sporting Goods' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for DICK'S Sporting Goods
How Do You 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 DICK'S Sporting Goods is:
72% = US$1.5b ÷ US$2.1b (Based on the trailing twelve months to January 2022).
The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.72.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
DICK'S Sporting Goods' Earnings Growth And 72% ROE
Firstly, we acknowledge that DICK'S Sporting Goods has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 32% also doesn't go unnoticed by us. As a result, DICK'S Sporting Goods' exceptional 37% net income growth seen over the past five years, doesn't come as a surprise.
We then compared DICK'S Sporting Goods' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 22% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Is DKS fairly valued? This infographic on the company's intrinsic value has everything you need to know.