Shares of Sprouts Farmers Market, Inc. (NASDAQ:SFM) are on an uptrend: Are strong financials guiding the market?

Sprouts Farmers Market (NASDAQ:SFM) stock is up 9.2% in the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In this article, we decided to focus on the ROE of Sprouts Farmers Market.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

How do you calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Sprouts Farmers Market is:

25% = $249 million ÷ $1.0 billion (based on trailing 12 months to April 2022).

The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every $1 of share capital it has, the company has made a profit of $0.25.

Why is ROE important for earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Based on the share 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. 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.

A side-by-side comparison of Sprouts Farmers Market earnings growth and 25% ROE

First, we recognize that Sprouts Farmers Market has a significantly high ROE. Second, even when compared to the industry average of 14%, the company’s ROE is quite impressive. This likely laid the foundation for Sprouts Farmers Market’s moderate 16% net income growth over the past five years.

In a next step, we benchmarked Sprouts Farmers Market net income growth with the industry, and fortunately, we found that the growth seen by the company is above the industry average growth of 7.8 %.

NasdaqGS: SFM Prior Earnings Growth as of July 31, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about Sprouts Farmers Market’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Does the sprout grower market use its profits efficiently?

Sprouts Farmers Market does not pay any dividends, which means that all its profits are reinvested in the company, which explains the good growth in profits of the company.

Conclusion

Overall, we think Sprouts Farmers Market performed quite well. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

James V. Payne