Parker-Hannifin (NYSE: PH) stock has risen 12% in the past three months. Given that the market rewards strong long-term financials, we wonder if this is the case in this case. In particular, we will pay particular attention to the ROE of Parker-Hannifin today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
See our latest analysis for Parker-Hannifin
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the Parker-Hannifin ROE is:
22% = US $ 1.9 billion Ã· US $ 8.5 billion (based on the last twelve months to September 2021).
The âreturnâ is the amount earned after tax over the past twelve months. This means that for every dollar in shareholders’ equity, the company generated $ 0.22 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 the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.
A side-by-side comparison of Parker-Hannifin’s 22% profit growth and ROE
First, we recognize that Parker-Hannifin has a significantly high ROE. In addition, the company’s ROE is 10% above the industry average, which is quite remarkable. This likely paved the way for the modest 13% net income growth seen by Parker-Hannifin over the past five years. growth
In the next step, we compared Parker-Hannifin’s net income growth with the industry, and luckily we found that the growth observed by the company is greater than the industry average growth of 8, 6%.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. What is PH worth today? The intrinsic value infographic in our free research report helps to visualize whether PH is currently poorly valued by the market.
Parker-Hannifin Using Profits Effectively?
Parker-Hannifin has a three-year median payout ratio of 30%, which means it keeps the remaining 70% of its profits. This suggests that its dividend is well hedged and, given the decent growth of the company, it appears that management is reinvesting its earnings in an efficient manner.
In addition, Parker-Hannifin has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. Our latest analyst data shows the company’s future payout ratio is expected to drop to 22% over the next three years. However, the company’s ROE is not expected to change much despite the expected lower payout ratio.
Overall, we are quite happy with the performance of Parker-Hannifin. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 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 documents. Simply Wall St has no position in any of the stocks mentioned.