Yahoo Finance Ferguson plc's (NYSE:FERG) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
With its stock down 9.0% over the past month, it is easy to disregard Ferguson (NYSE:FERG). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Ferguson's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Ferguson
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 Ferguson is:
44% = US$2.1b ÷ US$4.7b (Based on the trailing twelve months to January 2023).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.44 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Ferguson's Earnings Growth And 44% ROE
To begin with, Ferguson has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 20% the company's ROE is quite impressive. As a result, Ferguson's exceptional 20% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Ferguson'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 17% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for FERG? You can find out in our latest intrinsic value infographic research report.
Is Ferguson Making Efficient Use Of Its Profits?
The three-year median payout ratio for Ferguson is 34%, which is moderately low. The company is retaining the remaining 66%. So it seems that Ferguson is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Additionally, Ferguson has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 36% of its profits over the next three years. However, Ferguson's future ROE is expected to decline to 30% despite there being not much change anticipated in the company's payout ratio.
Conclusion
In total, we are pretty happy with Ferguson's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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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