Many of our readers will already be aware that Kroger's (NYSE:KR) share price has risen 7.8% over the past three months. Since a company's long-term fundamentals often drive market outcomes, we're curious to know if and how the company's financials are impacting this price movement. Specifically, we decided to look at Kroger's ROE in this article.
Return on Equity (ROE) is a useful tool to assess how effectively a company can generate profits on the investment it received from its shareholders. In other words, it reveals how successful a company is in converting shareholder investments into profits.
View our latest analysis for Kroger
How do you calculate return on equity?
of Return on Equity Formula teeth:
Return on Equity = Net Income (from continuing operations) / Shareholders' Equity
So, based on the above formula, Kroger's ROE is:
19% = US$2.2b ÷ US$12b (Based on the trailing 12 months to February 2024).
“Revenue” is the income a company has earned over the past year. In other words, for every $1 of shareholders' equity, the company generated $0.19 in profit.
What is the relationship between ROE and earnings growth?
We've already mentioned that ROE serves as an efficient profit-generating indicator to predict a company's future earnings. Depending on how much a company reinvests or “retains” these profits, and how effectively it does so, we are able to assess a company's earnings growth potential. Assuming all else remains constant, the higher the ROE and retained earnings, the higher a company's growth rate will be relative to companies that don't necessarily possess these characteristics.
Kroger's profit growth and 19% ROE
At first glance, Kroger's ROE looks decent. Especially when compared to the industry average of 12%, the company's ROE is pretty impressive. Given the circumstances, one can't help but wonder why Kroger has barely grown over the past five years. Therefore, there could be other aspects that could be hindering the company's growth. These could include low retained earnings and poor capital allocation.
As a next step, we compared Kroger’s net income growth to the industry and found that the average industry growth rate over the same period was 15%.
Earnings growth is a big driver of stock valuation. Investors need to see if the expected growth or decline in earnings, in either case, is priced into the price. This helps them determine if the stock is poised for a bright or bleak future. Is the market pricing in KR's future prospects? Find out in our latest intrinsic value infographic research report.
Is Kroger reinvesting its profits efficiently?
As mentioned above, Kroger's earnings have barely grown in the past three years, even though the median dividend payout ratio over the past three years is 37% (meaning the company retains 63% of its earnings), so there may be other reasons to explain the lack of growth in that regard – for example, the business may be in decline.
Additionally, Kroger has been paying dividends for at least 10 years, which means the company's management is determined to pay dividends even when there is little to no earnings growth. According to our most recent analyst data, the company's dividend payout ratio over the next three years is expected to be around 30%. As a result, Kroger's ROE is also not expected to change much, as we infer from analysts' future ROE forecast of 20%.
summary
Overall, we feel that Kroger certainly has some positive factors to consider. However, it is disappointing to see that earnings aren't growing despite the high ROE and high reinvestment rate. We wonder if there are external factors that could be negatively impacting the business. That being said, according to the latest industry analyst forecasts, analysts expect the company's earnings growth rate to improve significantly. You can learn more about the company's future earnings growth forecast here. free For more information, see the company's analyst forecast report.
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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by 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.
