Cracker Barrel Old Country Store, Inc.'s (NASDAQ:CBRL) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Cracker Barrel Old Country Store (NASDAQ:CBRL) has had a rough three months with its share price down 19%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Cracker Barrel Old Country Store's ROE in this article.

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

Check out our latest analysis for Cracker Barrel Old Country Store

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 Cracker Barrel Old Country Store is:

38% = US$243m ÷ US$648m (Based on the trailing twelve months to April 2021).

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 $0.38 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Cracker Barrel Old Country Store's Earnings Growth And 38% ROE

To begin with, Cracker Barrel Old Country Store has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. For this reason, Cracker Barrel Old Country Store's five year net income decline of 12% raises the question as to why the high ROE didn't translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 5.8% in the same period, we still found Cracker Barrel Old Country Store's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 CBRL worth today? The intrinsic value infographic in our free research report helps visualize whether CBRL is currently mispriced by the market.

Is Cracker Barrel Old Country Store Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 55% (implying that 45% of the profits are retained), most of Cracker Barrel Old Country Store's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 5 risks we have identified for Cracker Barrel Old Country Store visit our risks dashboard for free.

In addition, Cracker Barrel Old Country Store has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 51%. Still, forecasts suggest that Cracker Barrel Old Country Store's future ROE will drop to 30% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, it does look like Cracker Barrel Old Country Store has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, we studied current analyst estimates and discovered that analysts expect the company's earnings growth to improve slightly. Sure enough, this could bring some relief to shareholders. 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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This article by Simply Wall St is general in nature. 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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