Under Armor (NYSE: UAA) had a rough month with a 10% drop in its share price. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. In this article, we have decided to focus on the ROE of Under Armor.
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 do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Under Armor is:
20% = 360 million US $ 1.8 billion US $ (based on the last twelve months to June 2021).
The “return” is the income the business has earned over the past year. Another way to look at this is that for every dollar in equity, the company was able to make $ 0.20 in profit.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything 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. .
Under Armor profit growth and 20% ROE
At first glance, Under Armor appears to have a decent ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 14%. Needless to say, we’re quite surprised to see that Under Armor’s bottom line has declined 41% over the past five years. Therefore, there could be other aspects that could explain this. These include low profit retention or poor capital allocation.
In the next step, we compared the performance of Under Armor with that of the industry and found that the performance of Under Armor is depressing even when compared to the industry, which has shrunk its profits by 15% in the past. during the same period, which is slower than the business. .
NYSE: UAA Past Profit Growth October 5, 2021
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. This then helps them determine whether the stock is set for a bright or dark future. Is Under Armor just valued over other companies? Those 3 valuation measures could help you decide.
Is Under Armor Efficiently Using Retained Earnings?
Under Armor does not pay any dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it cannot use it to grow its business. There could therefore be other explanations in this regard. For example, the business of the company can deteriorate.
All in all, it seems that Under Armor has some positive aspects in its business. However, given the high ROE and high profit retention, we would expect the company to show strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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