Skechers USA, Inc. (NYSE: SKX) shares rally, but finance looks ambiguous: will momentum continue?
Skechers USA (NYSE: SKX) has seen strong growth in the equity market with stock rising 32% in the past three months. However, we have decided to pay attention to the fundamentals of the company which do not seem to give a clear sign on the financial health of the company. In this article, we have decided to focus on Skechers USA’s DEER.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
How is the ROE calculated?
the return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE of Skechers USA is:
7.8% = $ 220 million Ã· $ 2.8 billion (based on the last twelve months to March 2021).
The “return” is the profit of the last twelve months. One way to conceptualize this is that for every dollar of shareholder capital it has, the company has made a profit of $ 0.08.
Why is ROE important for profit growth?
We have already established that ROE serves as an effective gauge to generate profit for the future profits of a business. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
7.8% Profit Growth and ROE for Skechers USA
At first glance, Skechers USA’s ROE isn’t much to say. Another quick study shows that the company’s ROE also does not compare favorably to the industry average of 17%. Therefore, it may not be wrong to say that the 6.3% drop in five-year net income seen by Skechers USA was likely the result of lower ROE. We believe there could be other factors at play here as well. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.
Therefore, we compared Skechers USA’s performance to that of the industry and were disappointed to find that although the company was cutting profits, the industry increased its profits at a rate of 2.9% over the course of from the same period.
Profit growth is an important factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, whatever the case, is taken into account. In doing so, he will have an idea if the title is heading for clear blue waters or swampy waters ahead. Has the market taken into account SKX’s future outlook? You can find out in our latest intrinsic value infographic research report.
Is Skechers USA Efficiently Reinvesting Profits?
All in all, we are a little ambivalent about the performance of Skechers USA. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment does not yield any benefit to its investors, and moreover, it has a negative impact on profit growth. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. For more on the latest analyst forecasts for the business, check out this viewing analyst forecasts for the company.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in the mentioned stocks.
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