New Zealand markets closed
  • NZX 50

    11,730.52
    -29.49 (-0.25%)
     
  • NZD/USD

    0.6457
    +0.0027 (+0.41%)
     
  • NZD/EUR

    0.6286
    +0.0060 (+0.97%)
     
  • ALL ORDS

    7,288.80
    -36.60 (-0.50%)
     
  • ASX 200

    7,032.50
    -38.50 (-0.54%)
     
  • OIL

    91.88
    -2.46 (-2.61%)
     
  • GOLD

    1,818.90
    +11.70 (+0.65%)
     
  • NASDAQ

    13,565.87
    +273.89 (+2.06%)
     
  • FTSE

    7,500.89
    +34.98 (+0.47%)
     
  • Dow Jones

    33,761.05
    +424.38 (+1.27%)
     
  • DAX

    13,795.85
    +101.34 (+0.74%)
     
  • Hang Seng

    20,175.62
    +93.19 (+0.46%)
     
  • NIKKEI 225

    28,546.98
    +727.65 (+2.62%)
     
  • NZD/JPY

    86.1590
    +0.6720 (+0.79%)
     

STERIS plc's (NYSE:STE) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

·4-min read

With its stock down 18% over the past three months, it is easy to disregard STERIS (NYSE:STE). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on STERIS' ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for STERIS

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for STERIS is:

3.7% = US$243m ÷ US$6.5b (Based on the trailing twelve months to March 2022).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.04.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of STERIS' Earnings Growth And 3.7% ROE

It is hard to argue that STERIS' ROE is much good in and of itself. Not just that, even compared to the industry average of 10%, the company's ROE is entirely unremarkable. STERIS was still able to see a decent net income growth of 11% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared STERIS' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 15% in the same period, which is a bit concerning.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if STERIS is trading on a high P/E or a low P/E, relative to its industry.

Is STERIS Making Efficient Use Of Its Profits?

STERIS has a healthy combination of a moderate three-year median payout ratio of 35% (or a retention ratio of 65%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, STERIS is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 20% over the next three years. As a result, the expected drop in STERIS' payout ratio explains the anticipated rise in the company's future ROE to 8.9%, over the same period.

Conclusion

In total, it does look like STERIS has some positive aspects to its business. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting