Is Best Buy Co., Inc.'s (NYSE:BBY) Latest Stock Performance A Reflection Of Its Financial Health?

By
Simply Wall St
Published
November 10, 2021
NYSE:BBY
Source: Shutterstock

Best Buy (NYSE:BBY) has had a great run on the share market with its stock up by a significant 21% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Best Buy's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Best Buy

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 Best Buy is:

59% = US$2.5b ÷ US$4.3b (Based on the trailing twelve months to July 2021).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.58 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Best Buy's Earnings Growth And 59% ROE

Firstly, we acknowledge that Best Buy has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 29% which is quite remarkable. This probably laid the groundwork for Best Buy's moderate 16% net income growth seen over the past five years.

We then performed a comparison between Best Buy's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 16% in the same period.

past-earnings-growth
NYSE:BBY Past Earnings Growth November 11th 2021

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. Is BBY fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Best Buy Efficiently Re-investing Its Profits?

Best Buy has a three-year median payout ratio of 35%, which implies that it retains the remaining 65% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Best Buy has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 32%. However, Best Buy's ROE is predicted to rise to 85% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Best Buy's 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.

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