Overstock.com (NASDAQ: OSTK) has had an excellent performance in the equity market with a significant increase in its shares of 28% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In particular, we will be paying close attention to Overstock.com’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Overstock.com
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Overstock.com is:
19% = US $ 86 million ÷ US $ 449 million (based on the last twelve months to March 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.19.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.
Overstock.com profit growth and 19% ROE
At first glance, Overstock.com appears to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 22%. As you might expect, the 5.6% drop in net profit reported by Overstock.com is a bit of a surprise. So there could be other aspects that could explain this. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
However, when we compared Overstock.com’s growth to that of the industry, we found that while the company’s profits declined, the industry saw 30% profit growth over the course of from the same period. It is quite worrying.
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Is OSTK valued enough? This intrinsic business value infographic has everything you need to know.
Is Overstock.com Efficiently Using Its Retained Earnings?
Overall, we think Overstock.com has some positive attributes. 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, we have studied the latest analysts’ forecasts and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. 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 the mentioned stocks.
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