Are Robust Financials Driving The Recent Rally In Academy Sports and Outdoors, Inc.’s (NASDAQ:ASO) Stock?

Most readers would already be aware that Academy Sports and Outdoors’ (NASDAQ:ASO) stock increased significantly by 23% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Academy Sports and Outdoors’ ROE today.   

 Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital. 

See our latest analysis for Academy Sports and Outdoors

 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:

38% = US$497m ÷ US$1.3b (Based on the trailing twelve months to May 2021).

 The ‘return’ is the profit over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.38. 

 Why Is ROE Important For Earnings Growth? 

 So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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. 

 Academy Sports and Outdoors’ Earnings Growth And 38% ROE 

 Firstly, we acknowledge that Academy Sports and Outdoors has a significantly high ROE. Additionally, the company’s ROE is higher compared to the industry average of 27% which is quite remarkable. So, the substantial 59% net income growth seen by Academy Sports and Outdoors over the past five years isn’t overly surprising.    

 Next, on comparing with the industry net income growth, we found that Academy Sports and Outdoors’ growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.   

 The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is ASO fairly valued? This infographic on the company’s intrinsic value has everything you need to know.   

 Is Academy Sports and Outdoors Using Its Retained Earnings Effectively?  

 

 Conclusion  

 Overall, we are quite pleased with Academy Sports and Outdoors’ performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company. 

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.

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