First Watch Restaurant Group, Inc.’s (NASDAQ:FWRG) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

It is hard to get excited after looking at First Watch Restaurant Group’s (NASDAQ:FWRG) recent performance, when its stock has declined 28% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on First Watch Restaurant Group’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for First Watch Restaurant Group

How To Calculate Return On Equity?

Return on equity 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 First Watch Restaurant Group is:

4.0% = US$23m ÷ US$574m (Based on the trailing twelve months to March 2024).

The ‘return’ is the profit over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.04.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

First Watch Restaurant Group’s Earnings Growth And 4.0% ROE

It is quite clear that First Watch Restaurant Group’s ROE is rather low. Not just that, even compared to the industry average of 19%, the company’s ROE is entirely unremarkable. However, we we’re pleasantly surprised to see that First Watch Restaurant Group grew its net income at a significant rate of 104% in the last five years. Therefore, there could be other reasons behind this growth. Such as – high earnings retention or an efficient management in place.

As a next step, we compared First Watch Restaurant Group’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 26%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is FWRG worth today? The intrinsic value infographic in our free research report helps visualize whether FWRG is currently mispriced by the market.

Is First Watch Restaurant Group Efficiently Re-investing Its Profits?

First Watch Restaurant Group doesn’t pay any regular dividends to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what’s driving the high earnings growth number discussed above.

Conclusion

In total, it does look like First Watch Restaurant Group has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.

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