Are Spartan Company (NASDAQ:SPTN) fundamentals strong enough to warrant a buy given the stock’s recent weakness?

With its stock down 24% over the past three months, it’s easy to disregard SpartanNash (NASDAQ:SPTN). However, the company’s fundamentals look pretty good, and long-term financials generally align with future market price movements. Specifically, we decided to study the ROE of SpartanNash in this article.

ROE or Return on Equity is a useful tool to assess how effectively a company can generate returns on the investment received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for SpartanNash

How to Calculate Return on Equity?

Return on Equity can be calculated using the formula:

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

So, based on the above formula, SpartanNash’s ROE is:

4.5% = US$35m ÷ US$766m (based on trailing twelve months to December 2022).

The ‘return’ is the annual profit. This means that for every $1 worth of shareholders’ equity, the company generated $0.05 in profit.

Why is ROE Important for Earnings Growth?

So far, we have learned that ROE is a measure of the profitability of a company. We are able to evaluate a company’s future ability to generate profits based on what portion of its profits it chooses to reinvest or “retain”. In general, other things being equal, firms with high returns on equity and profit retention have higher growth rates than firms that do not share these characteristics.

Side-by-side comparison of SpartanNash’s earnings growth and 4.5% ROE

At first glance, SpartanNash’s ROE doesn’t look very promising. Next, compared to the industry average ROE of 11%, the company’s ROE makes us feel even less enthusiastic. Despite this, SpartanNash was able to significantly increase its net income at a rate of 40% over the past five years. Therefore, there may be other factors that are positively affecting the company’s earnings growth. For example, the company has a low payout ratio or is being managed efficiently.

Next, when compared with the industry’s net income growth, we find that SpartanNash’s growth is significantly higher than the industry average growth of 13% over the same period, which is great to see.

past earnings growth

Earnings growth is a huge factor in stock valuation. The investor should endeavor to establish that the expected growth or decline in earnings, as the case may be, is priced in. This helps them determine whether a stock is positioned for a bright or a bleak future. Has the market priced in SPTN’s future outlook? You can find out in our latest Intrinsic Value Infographic research report.

Is SpartanNash using its accumulated income effectively?

The three-year average payout ratio for SpartanNash is 43%, which is marginally lower. The remaining 57% is being kept by the company. This shows that its dividend is well covered, and given the high growth we discussed above, it looks like SpartanNash is reinvesting its earnings efficiently.

Additionally, SpartanNash has paid dividends for at least ten years in a row, which means the company is quite serious about sharing its profits with shareholders. Our latest analyst data shows that the company’s future payout ratio is expected to fall to 31% over the next three years. Accordingly, the expected decline in the payout ratio explains the expected 7.7% increase in the company’s ROE over the same period.

Summary

Overall, we think the SpartanNash definitely has some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a substantial portion of its profits back into its business has no doubt contributed to its high earnings growth. Having said that, the company’s earnings growth is expected to slow, as projected in current analyst estimates. To learn more about the latest analyst predictions for the company, view this visualization of analyst forecasts for the company.

Have feedback on this article? Worried about content? keep in touch directly with us. Alternatively, email editorial-team(at)simplywallst.com.

This Simply Wall St article is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock, and does not take into account 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 Street has no position in any of the stocks mentioned.

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