Canada markets closed
  • S&P/TSX

    20,714.48
    +13.98 (+0.07%)
     
  • S&P 500

    4,070.56
    +10.13 (+0.25%)
     
  • DOW

    33,978.08
    +28.67 (+0.08%)
     
  • CAD/USD

    0.7514
    +0.0007 (+0.10%)
     
  • CRUDE OIL

    79.38
    -1.63 (-2.01%)
     
  • BTC-CAD

    30,688.76
    -249.08 (-0.81%)
     
  • CMC Crypto 200

    526.66
    +9.65 (+1.87%)
     
  • GOLD FUTURES

    1,927.60
    -2.40 (-0.12%)
     
  • RUSSELL 2000

    1,911.46
    +8.39 (+0.44%)
     
  • 10-Yr Bond

    3.5180
    +0.0250 (+0.72%)
     
  • NASDAQ

    11,621.71
    +109.30 (+0.95%)
     
  • VOLATILITY

    18.51
    -0.22 (-1.17%)
     
  • FTSE

    7,765.15
    +4.04 (+0.05%)
     
  • NIKKEI 225

    27,382.56
    +19.81 (+0.07%)
     
  • CAD/EUR

    0.6910
    +0.0019 (+0.28%)
     

Are Strong Financial Prospects The Force That Is Driving The Momentum In Shoe Carnival, Inc.'s NASDAQ:SCVL) Stock?

Most readers would already be aware that Shoe Carnival's (NASDAQ:SCVL) stock increased significantly by 13% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Shoe Carnival's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Shoe Carnival

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 Shoe Carnival is:

22% = US$109m ÷ US$506m (Based on the trailing twelve months to October 2022).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.22.

Why Is ROE Important For 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.

Shoe Carnival's Earnings Growth And 22% ROE

To start with, Shoe Carnival's ROE looks acceptable. Yet, the fact that the company's ROE is lower than the industry average of 29% does temper our expectations. However, we are pleased to see the impressive 41% net income growth reported by Shoe Carnival over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this certainly also provides some context to the high earnings growth seen by the company.

We then compared Shoe Carnival's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 30% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Shoe Carnival fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shoe Carnival Making Efficient Use Of Its Profits?

Shoe Carnival's three-year median payout ratio to shareholders is 8.7%, which is quite low. This implies that the company is retaining 91% of its profits. So it looks like Shoe Carnival is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Shoe Carnival 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.

Conclusion

In total, we are pretty happy with Shoe Carnival's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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. 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.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here