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Most readers would already be aware that Winnebago Industries' (NYSE:WGO) stock increased significantly by 27% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Winnebago Industries' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Winnebago Industries
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 Winnebago Industries is:
31% = US$392m ÷ US$1.3b (Based on the trailing twelve months to May 2022).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.31 in profit.
What Is The Relationship Between ROE And 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.
Winnebago Industries' Earnings Growth And 31% ROE
Firstly, we acknowledge that Winnebago Industries has a significantly high ROE. Secondly, even when compared to the industry average of 26% the company's ROE is quite impressive. As a result, Winnebago Industries' exceptional 35% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Winnebago Industries' 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 20%.
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 WGO worth today? The intrinsic value infographic in our free research report helps visualize whether WGO is currently mispriced by the market.