Is Build-A-Bear Workshop, Inc.'s (NYSE:BBW) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Build-A-Bear Workshop's (NYSE:BBW) stock increased significantly by 11% over the past week. 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. In this article, we decided to focus on Build-A-Bear Workshop's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Build-A-Bear Workshop

How Do You 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 Build-A-Bear Workshop is:

39% = US$50m ÷ US$128m (Based on the trailing twelve months to May 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.39 in profit.

Why Is ROE Important For 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 Build-A-Bear Workshop's Earnings Growth And 39% ROE

First thing first, we like that Build-A-Bear Workshop has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 19% which is quite remarkable. So, the substantial 55% net income growth seen by Build-A-Bear Workshop over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Build-A-Bear Workshop's growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. Is BBW fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Build-A-Bear Workshop Efficiently Re-investing Its Profits?

Build-A-Bear Workshop's ' three-year median payout ratio is on the lower side at 5.7% implying that it is retaining a higher percentage (94%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Conclusion

Overall, we are quite pleased with Build-A-Bear Workshop's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.