Most readers already know that the stock of boohoo Group (LON: BOO) rose 1.8% in the past month. Given its impressive performance, we decided to study the company’s key financial metrics, as a company’s long-term fundamentals usually dictate market results. In this article, we have decided to focus on the ROE of the boohoo group.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for the boohoo group
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for the boohoo group is:
20% = £ 93million £ 473million (based on the last twelve months to February 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for every £ 1 invested by its shareholder, the company generates a profit of £ 0.20.
Why is ROE important for 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 “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of the boohoo group’s 20% profit growth and ROE
For starters, the boohoo group seems to have a respectable ROE. Even compared to the industry average of 20%, the company’s ROE looks pretty decent. Therefore, this likely laid the groundwork for the impressive 34% net income growth seen over the past five years by boohoo group. However, other drivers could also be behind this growth. Such as – high profit retention or effective management in place.
In the next step, we compared the net income growth of boohoo group with the industry, and luckily we found that the growth observed by the company is above the industry average growth by 16%.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. Has the market assessed BOO’s future prospects? You can find out in our latest Intrinsic Value infographic research report.
Does the boohoo group effectively use its profits?
Since the boohoo group does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to develop its business.
All in all, we are quite satisfied with the performance of the boohoo group. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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