It’s hard to get excited after watching the recent performance of Steven Madden Inc (NASDAQ:SHOO), as its stock is down 19% in the past three months. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we decided to focus on Steven Madden’s ROE.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for Steven Madden
How is ROE calculated?
the return on equity formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Steven Madden’s ROE is:
23% = $192 million ÷ $821 million (based on trailing 12 months to December 2021).
“Yield” is the income the business has earned over the past year. So, this means that for every $1 of investment by its shareholder, the firm generates a profit of $0.23.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Steven Madden earnings growth and ROE of 23%
First, we recognize that Steven Madden has a significantly high ROE. Second, even when compared to the industry average of 18%, the company’s ROE is quite impressive. As you might expect, the 11% drop in net income reported by Steven Madden does not bode well for us. We believe there could be other factors at play here that are preventing the company from growing. These include poor revenue retention or poor capital allocation.
Moreover, even relative to the industry, which has cut earnings at a rate of 5.2% over the same period, we found Steven Madden’s performance to be quite disappointing, as it suggests that the company reduced its profits at a faster pace. than industry.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Steven Madden is trading on a high P/E or a low P/E, relative to his industry.
Is Steven Madden Using His Retained Earnings Effectively?
Despite a normal three-year median payout rate of 32% (i.e. a retention rate of 68%), the fact that Steven Madden’s earnings have declined is quite puzzling. So there could be other explanations for this. For example, the company’s business may deteriorate.
Additionally, Steven Madden has paid dividends over a four-year period, suggesting that maintaining dividend payments is preferred by management, even if earnings are down. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 24% over the next three years. However, the company’s ROE is not expected to change much despite the lower expected payout ratio.
All in all, it looks like Steven Madden has positives for his business. However, given the high ROE and strong earnings retention, we would expect the company to post strong earnings growth, but that is not the case here. This suggests that there might be an external threat to the business, which is hampering its growth. That said, we have studied the latest analyst forecasts and found that although the company has decreased earnings in the past, analysts expect earnings to increase in the future. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.