Declining Stock and Decent Financials: Is The Market Wrong About PetMed Express, Inc. (NASDAQ:PETS)?

It’s hard to get excited after watching the recent performance of PetMed Express (NASDAQ:PETS), as its stock is down 5.2% in the past month. However, stock prices are usually determined by a company’s long-term finances, which in this case seem quite respectable. In particular, we will pay attention to the ROE of PetMed Express today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

How is ROE calculated?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for PetMed Express is:

14% = $19 million ÷ $140 million (based on trailing 12 months to June 2022).

The “return” is the annual profit. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.14.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A Side-by-Side Comparison of PetMed Express Earnings Growth and 14% ROE

At first glance, PetMed Express seems to have a decent ROE. Even when compared to the industry average of 13%, the company’s ROE looks pretty decent. For this reason, PetMed Express’ 9.5% decline in net income over five years raises the question of why decent ROE has not translated into growth. Based on this, we believe that there might be other reasons which have not been discussed so far in this article which might hinder the growth of the business. These include poor revenue retention or poor capital allocation.

So, in a next step, we benchmarked PetMed Express’ performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 23%. during the same period.

NasdaqGS: PETS Past Earnings Growth September 11, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. What is PETS worth today? The intrinsic value infographic in our free research report visualizes whether PETS is currently being mispriced by the market.

Does PetMed Express use its profits effectively?

PetMed Express’s earnings decline is not surprising given that the company spends most of its earnings paying dividends, judging by its three-year median payout ratio of 84% (or retention rate). 16%). With only a small portion reinvested in the business, earnings growth would obviously be weak or non-existent.

Additionally, PetMed Express has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. company. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to reach 132% over the next three years. Despite the higher expected payout ratio, the company’s ROE is not expected to change much.

Conclusion

Overall, we think PetMed Express has positive attributes. However, although the company has a high ROE, its earnings growth figure is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays out the rest as dividends. That said, we have studied the latest analyst forecasts and found that although the company has decreased earnings in the past, analysts expect earnings to increase in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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