With its stock down 30% over the past three months, it is easy to disregard PUMA (ETR:PUM). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to PUMA’s ROE today.
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 PUMA
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for PUMA is:
13% = €362m ÷ €2.7b (Based on the trailing twelve months to September 2023).
The ‘return’ is the yearly profit. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.13 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
A Side By Side comparison of PUMA’s Earnings Growth And 13% ROE
At first glance, PUMA seems to have a decent ROE. On comparing with the average industry ROE of 9.3% the company’s ROE looks pretty remarkable. This certainly adds some context to PUMA’s decent 16% net income growth seen over the past five years.
As a next step, we compared PUMA’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 7.7%.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Is PUM fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is PUMA Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 32% (implying that the company retains 68% of its profits), it seems that PUMA is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
Moreover, PUMA is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 34%. Regardless, the future ROE for PUMA is predicted to rise to 17% despite there being not much change expected in its payout ratio.
Conclusion
On the whole, we feel that PUMA’s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. We also studied the latest analyst forecasts and found that the company’s earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Valuation is complex, but we’re helping make it simple.
Find out whether PUMA is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
