Are Chuy’s Holdings, Inc. (NASDAQ:CHUY) Mixed Finances Driving the Negative Sentiment?
It’s hard to get excited after looking at the recent performance of Chuy’s Holdings Inc (NASDAQ:CHUY), as its stock is down 15% in the past three months. However, we decided to study the company’s financial statements to determine if they had anything to do with the price drop. Stock prices are usually determined by a company’s financial performance over the long term, and so we decided to pay more attention to the company’s financial performance. In particular, we will be paying attention to Chuy’s Holdings ROE 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 other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Chuy’s Holdings
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, Chuy’s Holdings’ ROE is:
9.8% = $26 million ÷ $264 million (based on trailing 12 months to September 2021).
The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.10.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.
Chuy’s Holdings earnings growth and ROE of 9.8%
At first glance, Chuy’s Holdings’ ROE does not look very promising. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 15%. For this reason, Chuy’s Holdings’ 19% decline in five-year net income is not surprising given its lower ROE. We believe there could be other factors at play here as well. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.
Moreover, even relative to the industry, which has cut earnings at a rate of 2.1% over the same period, we found Chuy’s Holdings’ performance to be quite disappointing, as it suggests the company cut profits at a faster rate than the industry.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Is Chuy’s Holdings fairly valued relative to other companies? These 3 assessment metrics might help you decide.
Is Chuy’s Holdings using its profits efficiently?
Chuy’s Holdings pays no dividends, which means that potentially all of its profits are reinvested in the company, which does not explain why the company’s profits have decreased if it retains all of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.
Overall, we have mixed feelings about Chuy’s Holdings. Even though it seems to keep most of its profits, given the low ROE, investors may not be benefiting from all that reinvestment after all. Weak earnings growth suggests our theory is correct. That said, we have studied the latest analyst forecasts and found that although the company has cut earnings in the past, analysts expect earnings to increase in the future. For more on the company’s future earnings growth forecast, check out this free analyst forecast report 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 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.