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Ulta Beauty (NASDAQ:ULTA) has had a rough three months with its share price down 16%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Ulta Beauty'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Ulta Beauty is:
48% = US$1.2b ÷ US$2.5b (Based on the trailing twelve months to February 2025).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.48.
View our latest analysis for Ulta Beauty
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Ulta Beauty's Earnings Growth And 48% ROE
First thing first, we like that Ulta Beauty has an impressive ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. So, the substantial 23% net income growth seen by Ulta Beauty over the past five years isn't overly surprising.
As a next step, we compared Ulta Beauty's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.
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. Is ULTA fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Ulta Beauty Making Efficient Use Of Its Profits?
Ulta Beauty doesn't pay any regular dividends to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.