Yahoo Finance Darden Restaurants, Inc.'s (NYSE:DRI) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
Darden Restaurants (NYSE:DRI) has had a rough three months with its share price down 13%. 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 Darden Restaurants' ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Darden Restaurants
How Do You 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 Darden Restaurants is:
48% = US$1.0b ÷ US$2.2b (Based on the trailing twelve months to February 2024).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.48 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. 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. 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 Darden Restaurants' Earnings Growth And 48% ROE
Firstly, we acknowledge that Darden Restaurants has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. This probably laid the groundwork for Darden Restaurants' moderate 20% net income growth seen over the past five years.
As a next step, we compared Darden Restaurants' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 26% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for DRI? You can find out in our latest intrinsic value infographic research report.
Is Darden Restaurants Using Its Retained Earnings Effectively?
Darden Restaurants has a significant three-year median payout ratio of 60%, meaning that it is left with only 40% 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.
Besides, Darden Restaurants has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 61%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 51%.
Conclusion
On the whole, we do feel that Darden Restaurants has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
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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.
