Most readers already know that Walgreens Boots Alliance (NASDAQ: WBA) stock has risen significantly 13% in the past three months. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. In this article, we have decided to focus on the ROE of Walgreens Boots Alliance.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how effectively their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest review for Walgreens Boots Alliance
How to calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE of Walgreens Boots Alliance is:
8.1% = US $ 2.0B Ã· US $ 24B (Based on the last twelve months to August 2021).
The “return” is the income the business has earned over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.08.
What does ROE have to do with 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. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Walgreens Boots Alliance Earnings Growth and ROE of 8.1%
At first glance, Walgreens Boots Alliance’s ROE doesn’t look very promising. Still, further study shows that the company’s ROE is similar to the industry average of 9.9%. But then again, Walgreens Boots Alliance’s five-year net income was down 25%. Keep in mind that the business has a slightly low ROE. Hence, lower income could also be the result of this.
So, in the next step, we compared the performance of Walgreens Boots Alliance to that of the industry and were disappointed to find that if the company reduced its profits, the industry increased its profits at a rate of 8. , 6% over the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. 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. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check whether Walgreens Boots Alliance is trading high P / E or low P / E, relative to its industry.
Is Walgreens Boots Alliance Reinvesting Profits Effectively?
Looking at its three-year median payout rate of 43% (or a retention rate of 57%) which is pretty normal, Walgreens Boots Alliance’s decline in earnings is rather disconcerting as one would expect to see good growth. when a company keeps a good portion of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, Walgreens Boots Alliance has paid dividends over a period of at least ten years, which means the management of the company is committed to paying dividends even if it means little to no growth in earnings. Our latest analyst data shows the company’s future payout ratio over the next three years is expected to be around 39%. However, Walgreens Boots Alliance’s ROE is expected to increase to 17% although there is no expected change in its payout ratio.
All in all, we are a bit ambivalent about the performance of Walgreens Boots Alliance. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment is not benefiting its investors and, moreover, it has a negative impact on profit 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 latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.