- United States
- Specialty Stores
Could The Market Be Wrong About Sportsman's Warehouse Holdings, Inc. (NASDAQ:SPWH) Given Its Attractive Financial Prospects?
Sportsman's Warehouse Holdings (NASDAQ:SPWH) has had a rough month with its share price down 14%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Sportsman's Warehouse Holdings' 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.
Check out our latest analysis for Sportsman's Warehouse Holdings
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 Sportsman's Warehouse Holdings is:
31% = US$88m ÷ US$283m (Based on the trailing twelve months to October 2022).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.31 in profit.
What Is The Relationship Between ROE And 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.
Sportsman's Warehouse Holdings' Earnings Growth And 31% ROE
First thing first, we like that Sportsman's Warehouse Holdings has an impressive ROE. Even when compared to the industry average of 28% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 40% net income growth seen by Sportsman's Warehouse Holdings was probably achieved as a result of the high ROE.
As a next step, we compared Sportsman's Warehouse Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 29%.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Sportsman's Warehouse Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Sportsman's Warehouse Holdings Making Efficient Use Of Its Profits?
Sportsman's Warehouse Holdings doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.
In total, we are pretty happy with Sportsman's Warehouse Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
Valuation is complex, but we're helping make it simple.
Find out whether Sportsman's Warehouse Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Sportsman's Warehouse Holdings
Sportsman's Warehouse Holdings, Inc., together with its subsidiaries, operates as an outdoor sporting goods retailer in the United States.
Excellent balance sheet with proven track record.