Stock Analysis

# Do Its Financials Have Any Role To Play In Driving Macy's, Inc.'s (NYSE:M) Stock Up Recently?

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Most readers would already be aware that Macy's' (NYSE:M) stock increased significantly by 25% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Macy's' ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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## 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 Macy's is:

41% = US\$1.4b ÷ US\$3.5b (Based on the trailing twelve months to October 2022).

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 \$0.41 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.

## Macy's' Earnings Growth And 41% ROE

First thing first, we like that Macy's has an impressive ROE. Secondly, even when compared to the industry average of 25% the company's ROE is quite impressive. For this reason, Macy's' five year net income decline of 12% raises the question as to why the high ROE didn't translate into earnings growth. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

That being said, we compared Macy's' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 13% in the same period.

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. Is Macy's fairly valued compared to other companies? These 3 valuation measures might help you decide.

## Is Macy's Using Its Retained Earnings Effectively?

Macy's' low three-year median payout ratio of 5.5% (implying that it retains the remaining 94% of its profits) comes as a surprise when you pair it with the shrinking earnings. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

In addition, Macy's has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 17% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 21% over the same period.

## Conclusion

Overall, we feel that Macy's certainly does have some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. That being so, the latest industry analyst forecasts show that analysts are forecasting a slight improvement in the company's future earnings growth. This could offer some relief to the company's existing shareholders. 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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