Is DICK'S Sporting Goods, Inc.'s (NYSE:DKS) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that DICK'S Sporting Goods' (NYSE:DKS) stock increased significantly by 33% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to DICK'S Sporting Goods' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for DICK'S Sporting Goods

How To Calculate Return On Equity?

ROE 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 DICK'S Sporting Goods is:

40% = US$1.0b ÷ US$2.6b (Based on the trailing twelve months to February 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.40.

Why Is ROE Important For 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.

DICK'S Sporting Goods' Earnings Growth And 40% ROE

First thing first, we like that DICK'S Sporting Goods has an impressive ROE. Secondly, even when compared to the industry average of 19% the company's ROE is quite impressive. As a result, DICK'S Sporting Goods' exceptional 28% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared DICK'S Sporting Goods' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 25% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Efficiently Re-investing Its Profits?

DICK'S Sporting Goods' three-year median payout ratio to shareholders is 12%, which is quite low. This implies that the company is retaining 88% of its profits. So it looks like DICK'S Sporting Goods is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, DICK'S Sporting Goods 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 33% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 31% over the same period.

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.

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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.