Columbia Sportswear Inc (NASDAQ:COLM) had a tough three months with its stock price down 10%. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In this article, we decided to focus on the ROE of Columbia Sportswear.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest review for Columbia Sportswear
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Columbia Sportswear‘s ROE is:
19% = $332 million ÷ $1.7 billion (based on trailing 12 months to June 2022).
“Yield” refers to a company’s earnings over the past year. This means that for every dollar of shareholders’ equity, the company generated $0.19 in profit.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Columbia Sportswear earnings growth and ROE of 19%
For starters, Columbia Sportswear seems to have a respectable ROE. Even when compared to the industry average of 21%, the company’s ROE looks pretty decent. This certainly adds some context to Columbia Sportswear’s moderate 12% net income growth seen over the past five years.
In a next step, we compared Columbia Sportswear’s net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 6.8%. .
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Has the market priced in COLM’s future prospects? You can find out in our latest infographic research report on intrinsic value.
Does Columbia Sportswear use its profits effectively?
Columbia Sportswear’s three-year median payout ratio to shareholders is 20% (implying it retains 80% of its revenue), which is lower, so it appears management is heavily reinvesting earnings to grow its activity.
Additionally, Columbia Sportswear is committed to continuing to share its earnings with shareholders, which we infer from its long history of paying dividends for at least ten years. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to reach 26% over the next three years. Either way, ROE is not expected to change much for the company despite the higher expected payout ratio.
Overall, we’re pretty happy with Columbia Sportswear’s performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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