Yahoo Finance Sleep Country Canada Holdings Inc.'s (TSE:ZZZ) Stock Has Fared Decently: Is the Market Following Strong Financials?
Most readers would already know that Sleep Country Canada Holdings' (TSE:ZZZ) stock increased by 9.4% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Sleep Country Canada Holdings' ROE in this article.
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 Sleep Country Canada Holdings
How Is ROE Calculated?
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 Sleep Country Canada Holdings is:
17% = CA$72m ÷ CA$429m (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.17.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
Sleep Country Canada Holdings' Earnings Growth And 17% ROE
To start with, Sleep Country Canada Holdings' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.7%. This probably laid the ground for Sleep Country Canada Holdings' moderate 14% net income growth seen over the past five years.
Next, on comparing Sleep Country Canada Holdings' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is ZZZ worth today? The intrinsic value infographic in our free research report helps visualize whether ZZZ is currently mispriced by the market.
Is Sleep Country Canada Holdings Using Its Retained Earnings Effectively?
Sleep Country Canada Holdings has a healthy combination of a moderate three-year median payout ratio of 30% (or a retention ratio of 70%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Sleep Country Canada Holdings has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 40% over the next three years. Still, forecasts suggest that Sleep Country Canada Holdings' future ROE will rise to 21% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.
Summary
On the whole, we feel that Sleep Country Canada Holdings' performance has been quite good. 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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
