Academy Sports and Outdoors (NASDAQ:ASO) has had a great run on the share market with its stock up by a significant 10% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Academy Sports and Outdoors' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Academy Sports and Outdoors is:

25% = US$487m ÷ US$2.0b (Based on the trailing twelve months to August 2024).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.25 in profit.

What Is The Relationship Between ROE And 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. 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.

Academy Sports and Outdoors' Earnings Growth And 25% ROE

Firstly, we acknowledge that Academy Sports and Outdoors has a significantly high ROE. Secondly, even when compared to the industry average of 20% the company's ROE is quite impressive. Probably as a result of this, Academy Sports and Outdoors was able to see a decent net income growth of 18% over the last five years.

We then performed a comparison between Academy Sports and Outdoors' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 20% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is ASO worth today? The intrinsic value infographic in our free research report helps visualize whether ASO is currently mispriced by the market.

Is Academy Sports and Outdoors Using Its Retained Earnings Effectively?

Academy Sports and Outdoors' three-year median payout ratio to shareholders is 4.6% (implying that it retains 95% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Academy Sports and Outdoors is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 9.7% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 19% over the same period.

Summary

Overall, we are quite pleased with Academy Sports and Outdoors' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.