Flowers Foods (NYSE: FLO) has had a strong run in the equity market with a significant increase in its shares of 15% in the past three months. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In this article, we have decided to focus on the ROE of Flowers Foods.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Flowers Foods is:
16% = US $ 223 million Ã· US $ 1.4 billion (based on the last twelve months to October 2021).
The “return” is the annual profit. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.16 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or âwithholdsâ and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
A side-by-side comparison of Flowers Foods profit growth and 16% ROE
For starters, Flowers Foods appears to have a respectable ROE. Compared to the industry’s average ROE of 11%, the company’s ROE looks quite remarkable. However, for some reason the higher returns are not reflected in Flowers Foods’ weak five-year average net income growth of 3.6%. This is interesting because high returns should mean that the company has the capacity to generate high growth, but for some reason it hasn’t been able to. We believe that low growth, when returns are high enough, could be the result of certain circumstances such as low profit retention or misallocation of capital.
In the next step, we compared the net income growth of Flowers Foods with that of the industry and luckily we found that the growth observed by the company is higher than the industry average growth of 2 , 8%.
NYSE: FLO Past Profit Growth Jan 2, 2022
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. Has the market taken into account FLO’s future prospects? You can find out in our latest intrinsic value infographic research report.
Are Flowers Foods Efficiently Reinvesting Its Profits?
With a high three-year median payout rate of 92% (or a retention rate of 8.1%), most of Flowers Foods’ profits go to shareholders. This certainly contributes to the weak profit growth observed by the company.
Additionally, Flowers Foods pays dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. . Estimates from existing analysts suggest that the company’s future payout ratio is expected to drop to 62% over the next three years. However, the company’s ROE is not expected to change much despite the expected lower payout ratio.
Overall, we think Flowers Foods has some positive attributes. Namely, its strong profit growth, which was likely due to its high ROE. However, investors could have benefited even more from the high ROE if the company had reinvested more of its profits. As we saw above, the company hardly keeps any of its profits. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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