Does The Market Have A Low Tolerance For Cracker Barrel Old Country Store, Inc.'s (NASDAQ:CBRL) Mixed Fundamentals?

Cracker Barrel Old Country Store (NASDAQ:CBRL) has had a rough three months with its share price down 18%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Cracker Barrel Old Country Store's ROE.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Cracker Barrel Old Country Store

How To Calculate Return On Equity?

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 Cracker Barrel Old Country Store is:

18% = US$83m ÷ US$462m (Based on the trailing twelve months to January 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.18 in profit.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Cracker Barrel Old Country Store's Earnings Growth And 18% ROE

To begin with, Cracker Barrel Old Country Store seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 17%. However, while Cracker Barrel Old Country Store has a pretty respectable ROE, its five year net income decline rate was 14% . Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

However, when we compared Cracker Barrel Old Country Store's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 22% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for CBRL? You can find out in our latest intrinsic value infographic research report.

Is Cracker Barrel Old Country Store Making Efficient Use Of Its Profits?

Cracker Barrel Old Country Store has a high three-year median payout ratio of 91% (that is, it is retaining 8.7% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 2 risks we have identified for Cracker Barrel Old Country Store.

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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 108% of its profits over the next three years. However, Cracker Barrel Old Country Store's ROE is predicted to rise to 24% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we have mixed feelings about Cracker Barrel Old Country Store. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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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.