Topgolf Callaway Brands Corp.'s (NYSE:MODG) Stock Is Going Strong: Have Financials A Role To Play?

Topgolf Callaway Brands (NYSE:MODG) has had a great run on the share market with its stock up by a significant 35% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Topgolf Callaway Brands' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Topgolf Callaway Brands

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Topgolf Callaway Brands is:

5.4% = US$204m ÷ US$3.8b (Based on the trailing twelve months to September 2022).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Topgolf Callaway Brands' Earnings Growth And 5.4% ROE

At first glance, Topgolf Callaway Brands' ROE doesn't look very promising. Next, when compared to the average industry ROE of 27%, the company's ROE leaves us feeling even less enthusiastic. Although, we can see that Topgolf Callaway Brands saw a modest net income growth of 17% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Topgolf Callaway Brands' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 34% in the same period, which is a bit concerning.

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 Topgolf Callaway Brands''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Topgolf Callaway Brands Efficiently Re-investing Its Profits?

Given that Topgolf Callaway Brands doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we feel that Topgolf Callaway Brands certainly does have some positive factors to consider. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.

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