Inventories at Costco Wholesale (NASDAQ: COST) have risen 9.6% in the past three months. Given that the market rewards strong, long-term financials, we wonder if this is the case in this case. Specifically, we have decided to study the ROE of Costco Wholesale 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. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for Costco Wholesale
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, Costco Wholesale’s ROE is:
28% = US $ 5.1 billion ÷ US $ 18 billion (based on the last twelve months to August 2021).
The “return” is the annual profit. Another way to look at this is that for every dollar in equity, the company was able to make $ 0.28 in profit.
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.
Profit growth for Costco Wholesale and 28% ROE
First, we recognize that Costco Wholesale has a significantly high ROE. Second, a comparison to the industry-reported average ROE of 11% doesn’t go unnoticed for us either. This likely paved the way for the modest 14% net income growth seen by Costco Wholesale over the past five years. growth
Then, comparing with the growth in net income of the industry, we found that the growth of Costco Wholesale is quite high compared to the industry average growth of 7.9% during the same period, this which is great to see.
Profit growth is a huge factor in the valuation of stocks. 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. Is TOC properly assessed? This intrinsic business value infographic has everything you need to know.
Is Costco Wholesale Efficiently Reinvesting Profits?
With a median payout rate of 29% over three years (implying that the company keeps 71% of its profits), it looks like Costco Wholesale is reinvesting effectively so as to see respectable profit growth and pay a dividend. well covered.
Additionally, Costco Wholesale has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 24%. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 23%.
Overall, we are very pleased with the performance of Costco Wholesale. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. 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.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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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