Shoe Zone plc's (LON:SHOE) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 31% over the past three months, it is easy to disregard Shoe Zone (LON:SHOE). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Shoe Zone's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Shoe Zone

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shoe Zone is:

49% = UK£14m ÷ UK£29m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.49 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 Shoe Zone's Earnings Growth And 49% ROE

Firstly, we acknowledge that Shoe Zone has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.7% which is quite remarkable. As a result, Shoe Zone's exceptional 31% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Shoe Zone's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 10%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Shoe Zone's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shoe Zone Making Efficient Use Of Its Profits?

Shoe Zone's three-year median payout ratio is a pretty moderate 39%, meaning the company retains 61% of its income. By the looks of it, the dividend is well covered and Shoe Zone is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

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

Summary

In total, we are pretty happy with Shoe Zone's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com