Skyline Champion Corporation's (NYSE:SKY) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

By
Simply Wall St
Published
January 12, 2022
NYSE:SKY
Source: Shutterstock

Skyline Champion (NYSE:SKY) has had a great run on the share market with its stock up by a significant 17% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Skyline Champion's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Skyline Champion

How To Calculate Return On Equity?

ROE 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 Skyline Champion is:

22% = US$149m ÷ US$663m (Based on the trailing twelve months to October 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.22 in profit.

What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Skyline Champion's Earnings Growth And 22% ROE

First thing first, we like that Skyline Champion has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 19% also doesn't go unnoticed by us. So, the substantial 45% net income growth seen by Skyline Champion over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Skyline Champion's growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.

past-earnings-growth
NYSE:SKY Past Earnings Growth January 12th 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is SKY worth today? The intrinsic value infographic in our free research report helps visualize whether SKY is currently mispriced by the market.

Is Skyline Champion Efficiently Re-investing Its Profits?

Given that Skyline Champion 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

Overall, we are quite pleased with Skyline Champion's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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