Is Weakness In DICK'S Sporting Goods, Inc. (NYSE:DKS) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

DICK'S Sporting Goods (NYSE:DKS) has had a rough three months with its share price down 8.9%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study DICK'S Sporting Goods' ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for DICK'S Sporting Goods

How Is ROE Calculated?

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 DICK'S Sporting Goods is:

39% = US$1.1b ÷ US$2.9b (Based on the trailing twelve months to August 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.39.

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.

DICK'S Sporting Goods' Earnings Growth And 39% ROE

First thing first, we like that DICK'S Sporting Goods has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 19% which is quite remarkable. Under the circumstances, DICK'S Sporting Goods' considerable five year net income growth of 22% was to be expected.

We then compared DICK'S Sporting Goods' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 17% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is DKS worth today? The intrinsic value infographic in our free research report helps visualize whether DKS is currently mispriced by the market.

Is DICK'S Sporting Goods Making Efficient Use Of Its Profits?

DICK'S Sporting Goods has a really low three-year median payout ratio of 16%, meaning that it has the remaining 84% left over to reinvest into its business. So it looks like DICK'S Sporting Goods is reinvesting profits heavily to grow its business, which shows in its earnings growth.

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. 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. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we feel that DICK'S Sporting Goods' performance has been quite good. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.