With its stock down 3.4% over the past week, it’s easy to ignore Rotork (LON: ROR). However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we’ve chosen to focus on Rotork’s ROE.
ROE, or return on equity, is a useful tool for assessing how effectively a company can generate returns on the investments received from its shareholders. In other words, it shows the company’s success in turning shareholder investments into profits.
See our latest analysis for Rotork
How do you calculate the return on equity?
The ROE can be calculated using the formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Rotork is:
17% = £ 96m £ 567m (based on 12 months ended June 2021).
The “return” is the profit made over the past twelve months. Another way to imagine this is that for every £ 1 worth of equity, the company was able to make a profit of £ 0.17.
Why is ROE important to earnings growth?
So far we have learned that the ROE measures how efficiently a company generates its profits. Depending on how much of these profits the company reinvests or “withholds” and how effectively this is done, we can then estimate a company’s earnings growth potential. In general, all other things being equal, companies with high ROE and retained earnings will grow faster than companies that do not share these attributes.
Rotork’s earnings growth and 17% ROE
First off, the Rotork ROE looks acceptable. Additionally, the company’s ROE does quite well compared to the industry average of 11%. This was likely the cornerstone of Rotork’s moderate 10% net income growth over the past five years.
We then performed a comparison between Rotork’s net profit growth and the industry, which found that the company’s growth was equal to average industry growth of 9.1% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know if the market has factored in the company’s expected earnings growth (or decline). That way, they can determine if the future of the stock looks promising or threatening. A good indicator of expected earnings growth is P / E, which determines the price the market is willing to pay for a stock based on its earnings outlook. So you might want to check if Rotork is trading at a high P / E ratio or a low P / E ratio compared to its industry.
Is Rotork Using Its Profits Efficiently?
Rotork has a sizeable average payout ratio of 58% over three years, which means it only has 42% left to invest in its business. This means the company has seen decent earnings growth despite returning most of its profits to shareholders.
In addition, Rotork has been paying dividends for at least ten years. This shows that the company is keen to share the profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio is projected to be around 51% over the next three years. Accordingly, projections indicate that Rotork’s future ROE will be 19%, which in turn is similar to its current ROE.
Overall, we are very pleased with Rotork’s performance. Above all, the high ROE, which contributed to the impressive growth in earnings. Although the company has only reinvested a small portion of its profits, it has still managed to increase its profits noticeably. The latest forecasts from industry analysts show the company is expected to maintain its current rate of growth. To learn more about the latest analyst forecast for the company, check out this analyst forecast visualization for the company.
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This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in any of the stocks mentioned.