Is Big 5 Sporting Goods Corporation's (NASDAQ:BGFV) Recent Stock Performance Influenced By Its Fundamentals In Any Way?
Big 5 Sporting Goods (NASDAQ:BGFV) has had a great run on the share market with its stock up by a significant 36% over the last three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Big 5 Sporting Goods’ ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Big 5 Sporting Goods
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Big 5 Sporting Goods is:
17% = US$35m ÷ US$213m (Based on the trailing twelve months to September 2020).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.17.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Big 5 Sporting Goods’ Earnings Growth And 17% ROE
At first glance, Big 5 Sporting Goods seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. However, while Big 5 Sporting Goods has a pretty respectable ROE, its five year net income decline rate was 14% . Based on this, we feel that there might be other reasons which haven’t been discussed so far in this article that could be hampering the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
So, as a next step, we compared Big 5 Sporting Goods’ performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 4.8% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Is Big 5 Sporting Goods fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Big 5 Sporting Goods Using Its Retained Earnings Effectively?
Big 5 Sporting Goods’ low three-year median payout ratio of 12% (or a retention ratio of 88%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company’s earnings have actually shrunk. This typically shouldn’t be the case when a company is retaining most of its earnings. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.
In addition, Big 5 Sporting Goods has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Conclusion
In total, it does look like Big 5 Sporting Goods has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn’t the case here. This suggests that there might be some external threat to the business, that’s hampering its growth. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Big 5 Sporting Goods.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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