Walgreens Boots Alliance, Inc.'s (NASDAQ:WBA) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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Walgreens Boots Alliance (NASDAQ:WBA) has had a rough three months with its share price down 18%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Walgreens Boots Alliance’s ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Walgreens Boots Alliance

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 Walgreens Boots Alliance is:

16% = US$4.9b ÷ US$31b (Based on the trailing twelve months to May 2022).

The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.16 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

Walgreens Boots Alliance’s Earnings Growth And 16% ROE

At first glance, Walgreens Boots Alliance seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. As you might expect, the 9.6% net income decline reported by Walgreens Boots Alliance is a bit of a surprise. We reckon that there could be some other factors at play here that are preventing the company’s growth. These include low earnings retention or poor allocation of capital.

However, when we compared Walgreens Boots Alliance’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 8.2% in the same period. This is quite worrisome.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Walgreens Boots Alliance’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Walgreens Boots Alliance Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 43% (that is, a retention ratio of 57%), the fact that Walgreens Boots Alliance’s earnings have shrunk is quite puzzling. So there could be some other explanations in that regard. For instance, the company’s business may be deteriorating.

Additionally, Walgreens Boots Alliance has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 39% of its profits over the next three years. Regardless, Walgreens Boots Alliance’s ROE is speculated to decline to 11% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we do feel that Walgreens Boots Alliance has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. In addition, latest analyst forecasts reveal 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.

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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