Yahoo Finance Will Weakness in Cal-Maine Foods, Inc.'s (NASDAQ:CALM) Stock Prove Temporary Given Strong Fundamentals?
Cal-Maine Foods (NASDAQ:CALM) has had a rough three months with its share price down 3.3%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Cal-Maine Foods' ROE in this article.
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. 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 Cal-Maine Foods
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Cal-Maine Foods is:
16% = US$274m ÷ US$1.7b (Based on the trailing twelve months to March 2024).
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 $0.16.
Why Is ROE Important For 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. 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.
A Side By Side comparison of Cal-Maine Foods' Earnings Growth And 16% ROE
To begin with, Cal-Maine Foods seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This certainly adds some context to Cal-Maine Foods' exceptional 60% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that Cal-Maine Foods' growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Cal-Maine Foods is trading on a high P/E or a low P/E, relative to its industry.
Is Cal-Maine Foods Making Efficient Use Of Its Profits?
The three-year median payout ratio for Cal-Maine Foods is 33%, which is moderately low. The company is retaining the remaining 67%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Cal-Maine Foods is reinvesting its earnings efficiently.
Moreover, Cal-Maine Foods is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Summary
In total, we are pretty happy with Cal-Maine Foods' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
