Is Weakness In Walmart Inc. (NYSE:WMT) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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It is hard to get excited after looking at Walmart’s (NYSE:WMT) recent performance, when its stock has declined 18% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Walmart’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Walmart

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Walmart is:

15% = US$13b ÷ US$86b (Based on the trailing twelve months to April 2022).

The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

A Side By Side comparison of Walmart’s Earnings Growth And 15% ROE

At first glance, Walmart seems to have a decent ROE. Especially when compared to the industry average of 13% the company’s ROE looks pretty impressive. Probably as a result of this, Walmart was able to see a decent growth of 6.4% over the last five years.

We then performed a comparison between Walmart’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 7.8% in the same period.

past-earnings-growth

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. Doing so will help them establish if the stock’s future looks promising or ominous. What is WMT worth today? The intrinsic value infographic in our free research report helps visualize whether WMT is currently mispriced by the market.

Is Walmart Efficiently Re-investing Its Profits?

Walmart has a healthy combination of a moderate three-year median payout ratio of 45% (or a retention ratio of 55%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Walmart is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 32% over the next three years. As a result, the expected drop in Walmart’s payout ratio explains the anticipated rise in the company’s future ROE to 22%, over the same period.

Summary

On the whole, we feel that Walmart’s performance has been quite good. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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.