Is Sonos, Inc.'s(NASDAQ:SONO) Recent Stock Performance Tethered To Its Strong Fundamentals?

By
Simply Wall St
Published
August 30, 2021
NasdaqGS:SONO
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Most readers would already be aware that Sonos' (NASDAQ:SONO) stock increased significantly by 23% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Sonos' ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Sonos

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Sonos is:

32% = US$186m ÷ US$587m (Based on the trailing twelve months to July 2021).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.32 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Sonos' Earnings Growth And 32% ROE

To begin with, Sonos has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 19% also doesn't go unnoticed by us. Under the circumstances, Sonos' considerable five year net income growth of 67% was to be expected.

Next, on comparing with the industry net income growth, we found that Sonos' growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.

past-earnings-growth
NasdaqGS:SONO Past Earnings Growth August 30th 2021

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for SONO? You can find out in our latest intrinsic value infographic research report.

Is Sonos Making Efficient Use Of Its Profits?

Summary

In total, we are pretty happy with Sonos' 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
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