Declining Stock and Solid Fundamentals: Is The Market Wrong About The Warehouse Group Limited (NZSE:WHS)?

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With its stock down 4.7% over the past three months, it is easy to disregard Warehouse Group (NZSE:WHS). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Warehouse Group’s ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for Warehouse 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 Warehouse Group is:

25% = NZ$111m ÷ NZ$447m (Based on the trailing twelve months to January 2022).

The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each NZ$1 of shareholders’ capital it has, the company made NZ$0.25 in profit.

What Has ROE Got To Do With 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. 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.

Warehouse Group’s Earnings Growth And 25% ROE

First thing first, we like that Warehouse Group has an impressive ROE. Additionally, the company’s ROE is higher compared to the industry average of 19% which is quite remarkable. This probably laid the groundwork for Warehouse Group’s moderate 16% net income growth seen over the past five years.

When you consider the fact that the industry earnings have shrunk at a rate of 1.5% in the same period, the company’s net income growth is pretty remarkable.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. 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. What is WHS worth today? The intrinsic value infographic in our free research report helps visualize whether WHS is currently mispriced by the market.

Is Warehouse Group Making Efficient Use Of Its Profits?

Warehouse Group has a significant three-year median payout ratio of 80%, meaning that it is left with only 20% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Warehouse Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 70% of its profits over the next three years. As a result, Warehouse Group’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 23% for future ROE.

Conclusion

In total, we are pretty happy with Warehouse Group’s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. 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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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