Are strong financial values driving the market?
Most readers already know that shares of Chipotle Mexican Grill (NYSE:CMG) are up a significant 13% over the past three months. Given that the market rewards strong financial companies over the long term, we wonder if that is the case in this case. Specifically, we decided to study the ROE of Chipotle Mexican Grill in this article.
Return on equity or ROE is a test of how effectively a company is increasing its value and managing investors’ money. In short, ROE shows the profit each dollar generates relative to its shareholders’ investments.
Check out our latest analysis for Chipotle Mexican Grill
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the formula above, the ROE of Chipotle Mexican Grill is:
39% = US$1.3 billion ÷ US$3.4 billion (based on the trailing twelve months to March 2024).
The “yield” is the amount earned after tax over the last twelve months. This therefore means that for every dollar of its shareholder’s investment, the company generates a profit of $0.39.
Why is ROE important for profit growth?
We have already established that ROE is an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “retain”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Chipotle Mexican Grill Earnings Growth and ROE of 39%
To begin with, Chipotle Mexican Grill has a fairly high ROE, which is interesting. Secondly, a comparison with the industry average ROE of 19% also does not go unnoticed. Under these circumstances, we would have expected Chipotle Mexican Grill to see a considerable growth in net income over five years of 35%.
In the next step, we compared Chipotle Mexican Grill’s net income growth to the industry and, fortunately, we found that the growth recorded by the company is higher than the industry average growth of 26%.
Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is heading towards clear blue waters or if swampy waters await them. Is Chipotle Mexican Grill fairly valued compared to other companies? These 3 valuation measures could help you make a decision.
Is Chipotle Mexican Grill reinvesting its profits effectively?
Chipotle Mexican Grill does not pay regular dividends to its shareholders, meaning the company has reinvested all of its profits into the business. This likely explains the high profit growth discussed above.
Conclusion
All in all, we’re pretty happy with Chipotle Mexican Grill’s performance. We particularly like the fact that the company is reinvesting heavily in its business and at a high rate of return. Unsurprisingly, this led to impressive profit growth. That being said, a study of the latest analyst forecasts shows that the company is expected to see a slowdown in future earnings growth. To learn more about the company’s future earnings growth forecast, check out this free report on analyst forecasts for the company to learn more.
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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 constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Any feedback on this article? Worried about the content? Contact us directly. You can also email editor-team@simplywallst.com
