Most readers would already be aware that Franklin Covey’s (NYSE:FC) stock increased significantly by 30% over the past three months. However, we wonder if the company’s inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Franklin Covey’s 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.
View our latest analysis for Franklin Covey
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Franklin Covey is:
6.0% = US$4.4m ÷ US$73m (Based on the trailing twelve months to February 2020).
The ‘return’ is the profit over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.06 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
A Side By Side comparison of Franklin Covey’s Earnings Growth And 6.0% ROE
When you first look at it, Franklin Covey’s ROE doesn’t look that attractive. Next, when compared to the average industry ROE of 12%, the company’s ROE leaves us feeling even less enthusiastic. Therefore, it might not be wrong to say that the five year net income decline of 58% seen by Franklin Covey was probably the result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. Such as – low earnings retention or poor allocation of capital.
That being said, we compared Franklin Covey’s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 17% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Franklin Covey fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Franklin Covey Using Its Retained Earnings Effectively?
Franklin Covey doesn’t pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn’t explain why the company’s earnings have shrunk if it is retaining all of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In total, we’re a bit ambivalent about Franklin Covey’s performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. 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.
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This article by Simply Wall St is general in nature. 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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