Most readers would already be aware that Natural Grocers by Vitamin Cottage's (NYSE:NGVC) stock increased significantly by 15% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Natural Grocers by Vitamin Cottage's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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 Natural Grocers by Vitamin Cottage is:
18% = US$28m ÷ US$154m (Based on the trailing twelve months to March 2022).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.18 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
A Side By Side comparison of Natural Grocers by Vitamin Cottage's Earnings Growth And 18% ROE
To start with, Natural Grocers by Vitamin Cottage's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 14%. Probably as a result of this, Natural Grocers by Vitamin Cottage was able to see an impressive net income growth of 24% over the last five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
We then compared Natural Grocers by Vitamin Cottage's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.8% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Is Natural Grocers by Vitamin Cottage fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Natural Grocers by Vitamin Cottage Making Efficient Use Of Its Profits?
Natural Grocers by Vitamin Cottage's three-year median payout ratio is a pretty moderate 28%, meaning the company retains 72% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Natural Grocers by Vitamin Cottage is reinvesting its earnings efficiently.
While Natural Grocers by Vitamin Cottage has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.
In total, we are pretty happy with Natural Grocers by Vitamin Cottage'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 3 risks we have identified for Natural Grocers by Vitamin Cottage by visiting our risks dashboard for free on our platform here.
What are the risks and opportunities for Natural Grocers by Vitamin Cottage?
Trading at 56.7% below our estimate of its fair value
Earnings grew by 8.8% over the past year
No risks detected for NGVC from our risks checks.
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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.