It is hard to get excited after looking at Oxford Industries’ (NYSE:OXM) 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 Oxford Industries’ ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
See our latest analysis for Oxford Industries
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Oxford Industries is:
4.8% = US$30m ÷ US$622m (Based on the trailing twelve months to August 2024).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.05 in profit.
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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
At first glance, Oxford Industries’ ROE doesn’t look very promising. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 13%. Despite this, surprisingly, Oxford Industries saw an exceptional 26% net income growth over the past five years. So, there might be other aspects that are positively influencing the company’s earnings growth. Such as – high earnings retention or an efficient management in place.
As a next step, we compared Oxford Industries’ 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 19%.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is OXM worth today? The intrinsic value infographic in our free research report helps visualize whether OXM is currently mispriced by the market.
