Simply Wall St
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Pool (NASDAQ:POOL) has had a rough three months with its share price down 9.6%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Pool’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.
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 Pool is:
33% = US$409m ÷ US$1.2b (Based on the trailing twelve months to March 2025).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.33 in profit.
Check out our latest analysis for Pool
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 thing first, we like that Pool has an impressive ROE. Additionally, the company’s ROE is higher compared to the industry average of 12% which is quite remarkable. Despite this, Pool’s five year net income growth was quite low averaging at only 4.1%. That’s a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.
We then compared Pool’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 3.2% in the same 5-year period.
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. Doing so will help them establish if the stock’s future looks promising or ominous. Is POOL fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
