Is Sprouts Farmers Market, Inc.'s (NASDAQ:SFM) Latest Stock Performance Being Led By Its Strong Fundamentals?

December 21, 2020
  •  Updated
October 01, 2022
NasdaqGS:SFM
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Most readers would already know that Sprouts Farmers Market's (NASDAQ:SFM) stock increased by 3.5% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Sprouts Farmers Market's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Sprouts Farmers Market

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 Sprouts Farmers Market is:

31% = US$251m ÷ US$808m (Based on the trailing twelve months to September 2020).

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 $0.31 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Sprouts Farmers Market's Earnings Growth And 31% ROE

Firstly, we acknowledge that Sprouts Farmers Market has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. This likely paved the way for the modest 9.7% net income growth seen by Sprouts Farmers Market over the past five years. growth

As a next step, we compared Sprouts Farmers Market'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 6.2%.

past-earnings-growth
NasdaqGS:SFM Past Earnings Growth December 22nd 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for SFM? You can find out in our latest intrinsic value infographic research report.

Is Sprouts Farmers Market Efficiently Re-investing Its Profits?

Conclusion

On the whole, we feel that Sprouts Farmers Market's performance has been quite good. 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, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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