Hibbett's (NASDAQ:HIBB) stock is up by 8.7% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Hibbett's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Hibbett

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hibbett is:

42% = US$129m ÷ US$306m (Based on the trailing twelve months to April 2022).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.42 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Hibbett's Earnings Growth And 42% ROE

To begin with, Hibbett has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 31% also doesn't go unnoticed by us. As a result, Hibbett's exceptional 39% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Hibbett'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 31%.

Earnings growth is an important metric to consider when valuing a stock. 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. Is HIBB fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Hibbett Using Its Retained Earnings Effectively?

Hibbett's three-year median payout ratio to shareholders is 5.4%, which is quite low. This implies that the company is retaining 95% of its profits. So it looks like Hibbett is reinvesting profits heavily to grow its business, which shows in its earnings growth.