Shares of Ultra Beauty (NASDAQ: ULTA) have risen 5.6% in the past three months. We wonder if and what role company financials are playing in this price change, as a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Ulta Beauty ROE in this article.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest review for Ulta Beauty
How is the ROE calculated?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Ulta Beauty is:
26% = US $ 485 million ÷ US $ 1.8 billion (based on the last twelve months to May 2021).
The “return” is the income the business has earned over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.26.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the company is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of Ultra Beauty’s 26% profit growth and ROE
First of all, we love that Ultra Beauty has an impressive ROE. Moreover, even comparing with the industry average if 24%, the ROE of the company is quite respectable. Given the circumstances, we can’t help but wonder why Ulta Beauty has experienced little or no growth over the past five years. Based on this, we believe that there might be other reasons that have not been addressed so far in this article that may be hampering the growth of the business. These include low profit retention or poor capital allocation.
As a next step, we compared Ultra Beauty’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 8.0% over the course of from the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. If you’re wondering about the Ultra Beauty rating, check out this gauge of its price / earnings ratio, compared to its industry.
Is Ulta Beauty effectively reinvesting its profits?
Conclusion
All in all, it seems that Ulta Beauty has positive aspects in its business. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and is reinvesting a huge chunk of its earnings. At first glance, there could be other factors, which do not necessarily control the business, which are preventing growth. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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