Will Weakness in Caleres, Inc.'s (NYSE:CAL) Stock Prove Temporary Given Strong Fundamentals?

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

Wed, Feb 5, 2025, 6:29 AM 3 min read

Caleres (NYSE:CAL) has had a rough three months with its share price down 43%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Caleres' ROE today.

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.

View our latest analysis for Caleres

How To Calculate Return On Equity?

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 Caleres is:

26% = US$158m ÷ US$606m (Based on the trailing twelve months to November 2024).

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 $0.26.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Caleres' Earnings Growth And 26% ROE

To begin with, Caleres has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 19% which is quite remarkable. As a result, Caleres' exceptional 54% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Caleres' 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 17%.

past-earnings-growth — NYSE:CAL Past Earnings Growth February 5th 2025

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Caleres''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Caleres Making Efficient Use Of Its Profits?

Caleres' three-year median payout ratio to shareholders is 6.0%, which is quite low. This implies that the company is retaining 94% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, Caleres 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 6.9%. Regardless, Caleres' ROE is speculated to decline to 15% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with Caleres' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.