Do Its Financials Have Any Role To Play In Driving Topgolf Callaway Brands Corp.'s (NYSE:MODG) Stock Up Recently?

Stock Analysis

Topgolf Callaway Brands' (NYSE:MODG) stock is up by a considerable 15% over the past week. 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. Specifically, we decided to study Topgolf Callaway Brands' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Topgolf Callaway Brands

The formula for return on equity is:

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

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

2.5% = US$96m ÷ US$3.8b (Based on the trailing twelve months to March 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.03 in profit.

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

It is hard to argue that Topgolf Callaway Brands' ROE is much good in and of itself. Not just that, even compared to the industry average of 19%, the company's ROE is entirely unremarkable. Although, we can see that Topgolf Callaway Brands saw a modest net income growth of 19% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between Topgolf Callaway Brands' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 23% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Topgolf Callaway Brands is trading on a high P/E or a low P/E, relative to its industry.

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.

Overall, we feel that Topgolf Callaway Brands certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

Find out whether Topgolf Callaway Brands is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.

Topgolf Callaway Brands Corp. designs, manufactures, and sells golf equipment, golf and lifestyle apparel, and other accessories in the United States, Europe, Asia, and Internationally.

Reasonable growth potential with questionable track record.