With stock down 9.2% over the past three months, it’s easy to disregard DICK’s Sporting Goods (NYSE:DKS). However, a closer look at the solid financials might make you think. Given that fundamentals typically drive long-term market outcomes, the company is worth considering. In this article, we have chosen to focus on the ROE of DICK’S Sporting Goods.
Return on Equity, or ROE, is a key metric used to assess how efficiently a company’s management is using the company’s capital. In other words, it shows the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for DICK’S sporting goods
How do you calculate return on equity?
The return on equity can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for DICK’S Sporting Goods is:
72% = $1.5 billion ÷ $2.1 billion (based on trailing 12 months to January 2022).
The “return” is the profit of the last twelve months. So that means that for every $1 of investment by its shareholders, the company earns $0.72 in profit.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an efficient profitable measure of a company’s future profits. We now need to evaluate how much profit the company is reinvesting or “keeping” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else remains the same, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
DICK’S Sporting Goods revenue growth and 72% ROE
First, we recognize that DICK’S Sporting Goods has a significantly high ROE. Second, we also see a comparison to the industry-reported average ROE of 32%. As such, DICK’S Sporting Goods’ extraordinary net income growth of 37% over the past five years comes as no surprise.
The story goes on
We then compared DICK’S Sporting Goods net income growth to the industry and are pleased to note that the company’s growth number compares favorably to the industry which is growing at a rate of 22% over the same period.
past earnings growth
Earnings growth is an important factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This allows them to determine if the stock’s future looks bright or ominous. Is DKS fairly rated? This company intrinsic value infographic has everything you need to know.
Is DICK’S Sporting Goods using its retained earnings effectively?
DICK’S Sporting Goods’ three-year average payout ratio is a fairly modest 28%, meaning the company keeps 72% of its earnings. This suggests the dividend is well-covered, and given the high growth mentioned above, it looks like DICK’S Sporting Goods is efficiently reinvesting its earnings.
In addition, DICK’S Sporting Goods has been paying dividends for at least ten years. This shows that the company has an obligation to share profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 17% over the next three years. However, DICK’S Sporting Goods’ future ROE is expected to fall to 34% despite the expected drop in its payout ratio. We conclude that there may be other factors driving the projected decline in the company’s ROE.
Overall, we consider the performance of DICK’S Sporting Goods to be quite good. In particular, it’s great to see that the company has invested heavily in its business and has resulted in significant earnings growth along with a high rate of return. Because of this, according to the latest forecasts from industry analysts, the company’s profits are expected to shrink in the future. To learn more about the company’s future earnings growth projections, take a look free Report on analyst forecasts for the company to learn more.
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This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.