Kura Sushi USA, Inc. (NASDAQ:KRUS) Stock’s Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

With its stock down 44% over the past three months, it is easy to disregard Kura Sushi USA (NASDAQ:KRUS). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Kura Sushi USA’s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Kura Sushi USA

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 Kura Sushi USA is:

0.9% = US$1.5m ÷ US$165m (Based on the trailing twelve months to August 2023).

The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.01 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Kura Sushi USA’s Earnings Growth And 0.9% ROE

It is quite clear that Kura Sushi USA’s ROE is rather low. Even when compared to the industry average of 16%, the ROE figure is pretty disappointing. Kura Sushi USA was still able to see a decent net income growth of 5.8% over the past five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. Such as – high earnings retention or an efficient management in place.

As a next step, we compared Kura Sushi USA’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 20% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is KRUS worth today? The intrinsic value infographic in our free research report helps visualize whether KRUS is currently mispriced by the market.

Is Kura Sushi USA Efficiently Re-investing Its Profits?

Kura Sushi USA doesn’t pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.

Summary

Overall, we feel that Kura Sushi USA certainly does have some positive factors to consider. Specifically, its fairly high earnings growth number, which no doubt was backed by the company’s high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. 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.