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lululemon athletica (NASDAQ:LULU) has had a rough three months with its share price down 29%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to lululemon athletica's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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How To 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 lululemon athletica is:
42% = US$1.8b ÷ US$4.3b (Based on the trailing twelve months to February 2025).
The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.42.
View our latest analysis for lululemon athletica
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively 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 profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of lululemon athletica's Earnings Growth And 42% ROE
To begin with, lululemon athletica has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. Under the circumstances, lululemon athletica's considerable five year net income growth of 23% was to be expected.
As a next step, we compared lululemon athletica's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 20% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about lululemon athletica's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.