Stock Analysis

DICK'S Sporting Goods, Inc.'s (NYSE:DKS) Stock Is Going Strong: Is the Market Following Fundamentals?

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NYSE:DKS
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Most readers would already be aware that DICK'S Sporting Goods' (NYSE:DKS) stock increased significantly by 55% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on DICK'S Sporting Goods' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for DICK'S Sporting Goods

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 DICK'S Sporting Goods is:

57% = US$1.2b ÷ US$2.2b (Based on the trailing twelve months to July 2022).

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 $0.57 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

DICK'S Sporting Goods' Earnings Growth And 57% ROE

Firstly, we acknowledge that DICK'S Sporting Goods has a significantly high ROE. Secondly, even when compared to the industry average of 30% the company's ROE is quite impressive. So, the substantial 40% net income growth seen by DICK'S Sporting Goods over the past five years isn't overly surprising.

As a next step, we compared DICK'S Sporting Goods' 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 31%.

past-earnings-growth
NYSE:DKS Past Earnings Growth September 29th 2022

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for DKS? You can find out in our latest intrinsic value infographic research report.

Is DICK'S Sporting Goods Using Its Retained Earnings Effectively?

DICK'S Sporting Goods has a really low three-year median payout ratio of 20%, meaning that it has the remaining 80% 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.

Moreover, DICK'S Sporting Goods is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 21%. Still, forecasts suggest that DICK'S Sporting Goods' future ROE will drop to 44% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we are quite pleased with DICK'S Sporting Goods' 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Valuation is complex, but we're helping make it simple.

Find out whether DICK'S Sporting Goods 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.

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About NYSE:DKS

DICK'S Sporting Goods

DICK'S Sporting Goods, Inc., together with its subsidiaries, operates as a sporting goods retailer primarily in the eastern United States.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation4
Future Growth1
Past Performance2
Financial Health5
Dividends5

Read more about these checks in the individual report sections or in our analysis model.

Excellent balance sheet established dividend payer.