Universal Store Holdings Limited's (ASX:UNI) Stock Is Going Strong: Is the Market Following Fundamentals?

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editorial-team@simplywallst.com (Simply Wall St)

Thu, Oct 31, 2024, 2:50 PM 4 min read

Most readers would already be aware that Universal Store Holdings' (ASX:UNI) stock increased significantly by 32% 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. In this article, we decided to focus on Universal Store Holdings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Universal Store Holdings

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 Universal Store Holdings is:

23% = AU$34m ÷ AU$152m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.23 in profit.

Why Is ROE Important For 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. 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 Universal Store Holdings' Earnings Growth And 23% ROE

Firstly, we acknowledge that Universal Store Holdings has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 17% also doesn't go unnoticed by us. This likely paved the way for the modest 15% net income growth seen by Universal Store Holdings over the past five years.

We then performed a comparison between Universal Store Holdings' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 15% in the same 5-year period.

past-earnings-growth — ASX:UNI Past Earnings Growth October 31st 2024

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Universal Store Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Universal Store Holdings Making Efficient Use Of Its Profits?

While Universal Store Holdings has a three-year median payout ratio of 69% (which means it retains 31% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Universal Store Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 71%. As a result, Universal Store Holdings' ROE is not expected to change by much either, which we inferred from the analyst estimate of 25% for future ROE.

Summary

In total, we are pretty happy with Universal Store Holdings' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. 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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.