With its stock down 4.4% in the past three months, it’s easy to overlook Walgreens Boots Alliance (NASDAQ: WBA). It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more heavily on the negative aspects. Stock prices are generally determined by a company’s financial performance over the long term, which is why we have decided to pay more attention to the financial performance of the company. In this article, we have decided to focus on the ROE of Walgreens Boots Alliance.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Walgreens Boots Alliance
How is the ROE calculated?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Walgreens Boots Alliance is:
9.7% = US $ 2.2 billion ÷ US $ 23 billion (based on the last twelve months to May 2021).
“Return” refers to a company’s profits over the past year. Another way of thinking is that for every dollar of equity, the company was able to make $ 0.10 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Walgreens Boots Alliance profit growth and 9.7% ROE
When you first look at it, the ROE from Walgreens Boots Alliance doesn’t look so appealing. Still, further study shows that the company’s ROE is similar to the industry average of 12%. But Walgreens Boots Alliance has seen a five-year drop in net income of 22% over the past five years. Keep in mind that the business has a slightly low ROE. Therefore, lower income could also be the result of this.
That being said, we compared the performance of Walgreens Boots Alliance with that of the industry and we were concerned that although the company reduced its profits, the industry increased its profits at a rate of 7. , 9% over the same period.
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. Is Walgreens Boots Alliance valued enough compared to other companies? These 3 evaluation measures could help you decide.
Is Walgreens Boots Alliance Using Profits Effectively?
Despite a normal three-year median payout ratio of 38% (where it retains 63% of its profits), Walgreens Boots Alliance has seen its profits decline as we saw above. There could therefore be other explanations in this regard. For example, the business of the company can deteriorate.
Additionally, the Walgreens Boots Alliance has been paying dividends for at least a decade or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 38%. Either way, Walgreens Boots Alliance’s future ROE is expected to reach 17% despite the expected little change in its payout ratio.
All in all, we are a bit ambivalent about the performance of Walgreens Boots Alliance. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. That said, we have studied the latest analysts’ forecasts and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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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 material. Simply Wall St has no position in the mentioned stocks.
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