It’s easy to ignore ELF Beauty’s (NYSE:ELF) share price, which is down 18% over the past month, but if you look closely you might realise that the company’s strong financial position means the share price could rise over the long term, given that the market rewards companies with strong financials.In this article, we’ve decided to focus on ELF Beauty’s ROE.
Return on equity (ROE) is an important factor to consider for a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it measures a company’s profitability relative to shareholder’s capital.
Check out our latest analysis for ELF Beauty
How is ROE calculated?
The formula for calculating ROE is as follows:
Return on Equity = Net Income (from continuing operations) / Shareholders’ Equity
So, based on the above formula, Elf Beauty’s ROE is:
20% = US$128m ÷ US$643m (Based on the trailing 12 months to March 2024).
“Returns” refers to the earnings a company has made over the past year. Another way to think of this is that for every $1 worth of equity, the company was able to make $0.20 in profit.
What is the relationship between ROE and profit growth?
We’ve already mentioned that ROE serves as an efficient profit-generating indicator to predict a company’s future earnings. Depending on how much a company reinvests or “retains” these profits, and how effectively it does so, we are able to assess a company’s earnings growth potential. Assuming all else remains constant, the higher the ROE and retained earnings, the higher a company’s growth rate will be relative to companies that don’t necessarily possess these characteristics.
ELF BEAUTY’s revenue growth and 20% ROE
Firstly, ELF BEAUTY appears to have a respectable ROE. Moreover, the company’s ROE compares pretty favorably to the industry average of 14%. Perhaps as a result of this, ELF BEAUTY has been able to achieve an impressive net income growth of 66% over the past five years. We believe there could also be other aspects that are positively impacting the company’s earnings growth. For example, the company’s management could have made some good strategic decisions or the company’s dividend payout ratio could be low.
As a next step, we compare ELF Beauty’s net profit growth with the industry and are pleased to find that the company’s growth is above the industry average of 15%.
NYSE:ELF Historical Earnings Growth July 30, 2024
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already priced into the stock price. Doing so will help them determine if the stock’s future is promising or ominous. Is elf Beauty fairly valued relative to other companies? The following three valuation metrics may help you decide:
Is ELF Beauty putting its profits to good use?
elf Beauty isn’t currently paying a regular dividend, which means it is reinvesting virtually all of its profits back into the business, which no doubt contributes to the strong earnings growth rates discussed above.
summary
Overall, we are very pleased with ELF Beauty’s performance. In particular, it’s great to see the company investing heavily in its business, which coupled with strong profit margins has led to strong revenue growth. That said, a look at the latest analyst forecasts suggests that the company’s future revenue growth is expected to slow. Are these analyst forecasts based on wider industry expectations, or on the company’s fundamentals? Click here to be taken to the company’s analyst forecasts page.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
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