Lululemon Athletica (NASDAQ:LULU) has had a rough month with its share price down 12%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Lululemon Athletica's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Lululemon Athletica

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Lululemon Athletica is:

44% = US$1.7b ÷ US$4.0b (Based on the trailing twelve months to October 2024).

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 $0.44.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Lululemon Athletica's Earnings Growth And 44% ROE

First thing first, we like that Lululemon Athletica has an impressive ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. So, the substantial 23% net income growth seen by Lululemon Athletica over the past five years isn't overly surprising.

Next, on comparing Lululemon Athletica's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 22% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Lululemon Athletica fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Lululemon Athletica Efficiently Re-investing Its Profits?

Lululemon Athletica doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

On the whole, we feel that Lululemon Athletica's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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