Emerson Electric's (NYSE:EMR) stock up by 2.6% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Emerson Electric's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
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 Emerson Electric is:
17% = US$2.8b ÷ US$17b (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.17 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
Emerson Electric's Earnings Growth And 17% ROE
At first glance, Emerson Electric seems to have a decent ROE. Even when compared to the industry average of 16% the company's ROE looks quite decent. This certainly adds some context to Emerson Electric's moderate 8.4% net income growth seen over the past five years.
As a next step, we compared Emerson Electric's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 10% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is EMR fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Emerson Electric Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 52% (or a retention ratio of 48%) for Emerson Electric suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Emerson Electric has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 46% of its profits over the next three years. Regardless, Emerson Electric's ROE is speculated to decline to 12% despite there being no anticipated change in its payout ratio.
In total, we are pretty happy with Emerson Electric's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. 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. 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.
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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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