Flowers Foods, Inc.'s (NYSE:FLO) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

Flowers Foods' (NYSE:FLO) stock is up by 2.9% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. Specifically, we decided to study Flowers Foods' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Flowers Foods

How Do You 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 Flowers Foods is:

9.3% = US$129m ÷ US$1.4b (Based on the trailing twelve months to July 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.09.

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.

Flowers Foods' Earnings Growth And 9.3% ROE

On the face of it, Flowers Foods' ROE is not much to talk about. Next, when compared to the average industry ROE of 14%, the company's ROE leaves us feeling even less enthusiastic. Hence, the flat earnings seen by Flowers Foods over the past five years could probably be the result of it having a lower ROE.

We then compared Flowers Foods' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.2% in the same 5-year period, which is a bit concerning.

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 FLO? You can find out in our latest intrinsic value infographic research report.

Is Flowers Foods Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 84% (implying that the company keeps only 16% of its income) of its business to reinvest into its business), most of Flowers Foods' profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Flowers Foods 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 78% of its profits over the next three years. Regardless, the future ROE for Flowers Foods is predicted to rise to 20% despite there being not much change expected in its payout ratio.

Summary

Overall, we would be extremely cautious before making any decision on Flowers Foods. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.