Stock Analysis

Lakeland Industries, Inc.'s (NASDAQ:LAKE) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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NasdaqGM:LAKE
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Lakeland Industries (NASDAQ:LAKE) has had a rough month with its share price down 11%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Lakeland Industries' ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Lakeland Industries

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 Lakeland Industries is:

20% = US$20m ÷ US$103m (Based on the trailing twelve months to July 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.20 in profit.

What Has ROE Got To Do With 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.

Lakeland Industries' Earnings Growth And 20% ROE

To begin with, Lakeland Industries seems to have a respectable ROE. On comparing with the average industry ROE of 13% the company's ROE looks pretty remarkable. Needless to say, we are quite surprised to see that Lakeland Industries' net income shrunk at a rate of 17% over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

So, as a next step, we compared Lakeland Industries' performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 2.3% in the same period.

past-earnings-growth
NasdaqGM:LAKE Past Earnings Growth December 4th 2020

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Lakeland Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lakeland Industries Using Its Retained Earnings Effectively?

Summary

On the whole, we do feel that Lakeland Industries has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. Additionally, the latest industry analyst forecasts show that analysts expect the company's earnings to continue to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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What are the risks and opportunities for Lakeland Industries?

Lakeland Industries, Inc. manufactures and sells industrial protective clothing and accessories for the industrial and public protective clothing market worldwide.

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Rewards

  • Earnings are forecast to grow 111.62% per year

Risks

  • Profit margins (2%) are lower than last year (14.8%)

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