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With its stock down 24% over the past three months, it is easy to disregard Shoe Zone (LON:SHOE). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Shoe Zone's 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.
View our latest analysis for Shoe Zone
How To Calculate Return On Equity?
ROE 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 Shoe Zone is:
49% = UK£14m ÷ UK£29m (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.49.
Why Is ROE Important For 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. 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 Shoe Zone's Earnings Growth And 49% ROE
First thing first, we like that Shoe Zone has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 7.7% which is quite remarkable. Under the circumstances, Shoe Zone's considerable five year net income growth of 31% was to be expected.
As a next step, we compared Shoe Zone'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 10%.
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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Shoe Zone's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Shoe Zone Using Its Retained Earnings Effectively?
Shoe Zone's three-year median payout ratio is a pretty moderate 39%, meaning the company retains 61% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Shoe Zone is reinvesting its earnings efficiently.