Declining Stock and Solid Fundamentals: Is The Market Wrong About Fox Factory Holding Corp. (NASDAQ:FOXF)?

By
Simply Wall St
Published
February 20, 2022
NasdaqGS:FOXF
Source: Shutterstock

Fox Factory Holding (NASDAQ:FOXF) has had a rough three months with its share price down 34%. 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. Particularly, we will be paying attention to Fox Factory Holding's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Fox Factory Holding

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 Fox Factory Holding is:

19% = US$158m ÷ US$850m (Based on the trailing twelve months to October 2021).

The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.19 in profit.

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. 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.

Fox Factory Holding's Earnings Growth And 19% ROE

At first glance, Fox Factory Holding seems to have a decent ROE. Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. This certainly adds some context to Fox Factory Holding's exceptional 26% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Fox Factory Holding'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 1.3%.

past-earnings-growth
NasdaqGS:FOXF Past Earnings Growth February 20th 2022

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Fox Factory Holding is trading on a high P/E or a low P/E, relative to its industry.

Is Fox Factory Holding Making Efficient Use Of Its Profits?

Given that Fox Factory Holding doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with Fox Factory Holding's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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