Declining Stock and Decent Financials: Is The Market Wrong About Columbia Sportswear Company (NASDAQ:COLM)?

It is hard to get excited after looking at Columbia Sportswear’s (NASDAQ:COLM) recent performance, when its stock has declined 16% over the past month. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Columbia Sportswear’s ROE today.

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.

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 Columbia Sportswear is:

13% = US$223m ÷ US$1.8b (Based on the trailing twelve months to December 2024).

The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.13 in profit.

Check out our latest analysis for Columbia Sportswear

What Is The Relationship Between ROE And 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.

Columbia Sportswear’s Earnings Growth And 13% ROE

To begin with, Columbia Sportswear seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. Despite the moderate return on equity, Columbia Sportswear has posted a net income growth of 2.5% over the past five years. A few likely reasons that could be keeping earnings growth low are – the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Columbia Sportswear’s reported growth was lower than the industry growth of 21% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Columbia Sportswear’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Columbia Sportswear Using Its Retained Earnings Effectively?

While Columbia Sportswear has a decent three-year median payout ratio of 26% (or a retention ratio of 74%), it has seen very little growth in earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Columbia Sportswear has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. 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 28%. As a result, Columbia Sportswear’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 13% for future ROE.

Summary

Overall, we feel that Columbia Sportswear certainly does have some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn’t the case here. This suggests that there might be some external threat to the business, that’s hampering its growth. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. 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.

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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.