Ulta Beauty, Inc. (NASDAQ:ULTA) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

It is hard to get excited after looking at Ulta Beauty’s (NASDAQ:ULTA) recent performance, when its stock has declined 22% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Ulta Beauty’s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Ulta Beauty

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 Ulta Beauty is:

55% = US$1.3b ÷ US$2.3b (Based on the trailing twelve months to May 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 $0.55 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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 Ulta Beauty’s Earnings Growth And 55% ROE

To begin with, Ulta Beauty has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 18% which is quite remarkable. As a result, Ulta Beauty’s exceptional 23% net income growth seen over the past five years, doesn’t come as a surprise.

We then performed a comparison between Ulta Beauty’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 21% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. If you’re wondering about Ulta Beauty’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ulta Beauty Making Efficient Use Of Its Profits?

Ulta Beauty 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

Overall, we are quite pleased with Ulta Beauty’s performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.