Nike Inc (NKE)

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NIKE, Inc.'s (NYSE:NKE) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
By: Simply Wall St | April 4, 2022

It is hard to get excited after looking at NIKE's (NYSE:NKE) recent performance, when its stock has declined 19% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on NIKE's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

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

41% = US$6.1b ÷ US$15b (Based on the trailing twelve months to February 2022).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.41.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

NIKE's Earnings Growth And 41% ROE

Firstly, we acknowledge that NIKE has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. This likely paved the way for the modest 12% net income growth seen by NIKE over the past five years. growth

Next, on comparing with the industry net income growth, we found that the growth figure reported by NIKE compares quite favourably to the industry average, which shows a decline of 4.9% in the same period.


NYSE:NKE Past Earnings Growth April 4th 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is NKE worth today? The intrinsic value infographic in our free research report helps visualize whether NKE is currently mispriced by the market.

Is NIKE Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 32% (implying that the company retains 68% of its profits), it seems that NIKE is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, NIKE has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 29%. Accordingly, forecasts suggest that NIKE's future ROE will be 49% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with NIKE's performance. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum.

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