Emerson Electric (NYSE: EMR) had a tough week with its stock price down 4.9%. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean that the stock could potentially rise in the long term given how the markets typically reward long term fundamentals. more resistant. 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 increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest review for Emerson Electric
How to calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Emerson Electric’s ROE is:
23% = US $ 2.2 billion ÷ US $ 9.2 billion (based on the last twelve months to March 2021).
The “return” is the amount earned after tax over the past twelve months. This means that for every dollar in shareholders’ equity, the company generated $ 0.23 in profit.
Why is ROE important for profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Emerson Electric profit growth and 23% ROE
For starters, Emerson Electric has a pretty high ROE, which is interesting. Second, even compared to the industry average of 12%, the company’s ROE is quite impressive. This likely paved the way for the modest 6.8% net income growth seen by Emerson Electric over the past five years. growth
As a next step, we compared Emerson Electric’s net income growth with the industry and were disappointed to see that the company’s growth is below the industry average growth of 8.9% over the past year. same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Is the EMR properly assessed? This intrinsic business value infographic has everything you need to know.
Is Emerson Electric Reinvesting Profits Effectively?
While Emerson Electric has a three-year median payout rate of 56% (meaning it keeps 44% of profits), the company has seen good profit growth in the past, which means its High distribution rate did not hinder his ability to grow taller.
In addition, Emerson Electric is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 48%. However, Emerson Electric’s ROE is expected to reach 33% despite no expected change in its payout ratio.
All in all, it appears that Emerson Electric has positive aspects for its business. The company increased its profits moderately, as previously reported. Still, the high ROE could have been even more beneficial for investors if the company had reinvested more of its profits. As noted earlier, the current reinvestment rate appears to be quite low. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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