Shares of Hain Celestial Group, Inc. (NASDAQ:HAIN) fell but fundamentals look decent: will the market correct the stock price going forward?
With its shares down 30% in the past three months, it’s easy to overlook Hain Celestial Group (NASDAQ: HAIN). However, the company’s fundamentals look pretty decent and long-term financials are generally in line with future market price movements. Specifically, we decided to study Hain Celestial Group’s ROE in this article.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
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How is ROE calculated?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Hain Celestial Group is:
7.2% = $78 million ÷ $1.1 billion (based on trailing 12 months to June 2022).
The “yield” is the profit of the last twelve months. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.07.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. 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 Hain Celestial Group’s earnings growth and ROE of 7.2%
When you first look at it, Hain Celestial Group’s ROE doesn’t look so appealing. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 14%. Hain Celestial Group was still able to see a decent growth in net profit of 12% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
We then compared the net profit growth of Hain Celestial Group with the industry and we are glad to see that the growth figure of the company is higher compared to the industry which has a growth rate of 4, 3% over the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Hain Celestial Group is trading on a high P/E or a low P/E, relative to its industry.
Does Hain Celestial Group make effective use of its profits?
Hain Celestial Group does not pay any dividends, which means that all its profits are reinvested in the company, which explains the good growth of the profits of the company.
Overall, we think Hain Celestial Group has positive attributes. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.
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