Is Shoe Carnival, Inc.'s (NASDAQ:SCVL) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
December 24, 2021
NasdaqGS:SCVL
Source: Shutterstock

Shoe Carnival's (NASDAQ:SCVL) stock is up by a considerable 17% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Shoe Carnival's ROE today.

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.

See our latest analysis for Shoe Carnival

How To Calculate Return On Equity?

Return on equity 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 Shoe Carnival is:

33% = US$142m ÷ US$433m (Based on the trailing twelve months to October 2021).

The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.33 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. 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 Shoe Carnival's Earnings Growth And 33% ROE

To begin with, Shoe Carnival has a pretty high ROE which is interesting. Even when compared to the industry average of 31% the company's ROE is pretty decent. Given the circumstances, the significant 30% net income growth seen by Shoe Carnival over the last five years is not surprising.

We then compared Shoe Carnival'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 18% in the same period.

past-earnings-growth
NasdaqGS:SCVL Past Earnings Growth December 24th 2021

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Shoe Carnival is trading on a high P/E or a low P/E, relative to its industry.

Is Shoe Carnival Efficiently Re-investing Its Profits?

Shoe Carnival has a really low three-year median payout ratio of 12%, meaning that it has the remaining 88% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, Shoe Carnival has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Shoe Carnival's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth.

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