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PVH’s (NYSE:PVH) stock is up by a considerable 79% over the past three months. However, we wonder if the company’s inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study PVH’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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for PVH
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for PVH is:
9.4% = US$453m ÷ US$4.8b (Based on the trailing twelve months to October 2022).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.09 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of PVH’s Earnings Growth And 9.4% ROE
When you first look at it, PVH’s ROE doesn’t look that attractive. Next, when compared to the average industry ROE of 21%, the company’s ROE leaves us feeling even less enthusiastic. Given the circumstances, the significant decline in net income by 6.8% seen by PVH over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.
However, when we compared PVH’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 14% in the same period. This is quite worrisome.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about PVH’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is PVH Making Efficient Use Of Its Profits?
When we piece together PVH’s low LTM (or last twelve month) payout ratio of 2.2% (where it is retaining 98% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, PVH has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 1.6% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 13%, over the same period.
Conclusion
In total, we’re a bit ambivalent about PVH’s performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
What are the risks and opportunities for PVH?
PVH Corp. operates as an apparel company worldwide.
View Full Analysis
Rewards
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Price-To-Earnings ratio (12.1x) is below the US market (15x)
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Earnings are forecast to grow 25.2% per year
Risks
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Significant insider selling over the past 3 months
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Large one-off items impacting financial results
View all Risks and Rewards
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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