Yahoo Finance Will Weakness in Genuine Parts Company's (NYSE:GPC) Stock Prove Temporary Given Strong Fundamentals?
With its stock down 6.5% over the past month, it is easy to disregard Genuine Parts (NYSE:GPC). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Genuine Parts' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Genuine Parts
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 Genuine Parts is:
29% = US$1.3b ÷ US$4.4b (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.29 in profit.
What Is The Relationship Between ROE And 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. 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.
Genuine Parts' Earnings Growth And 29% ROE
To begin with, Genuine Parts has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 29% also portrays the company's ROE in a good light. Given the circumstances, the significant 23% net income growth seen by Genuine Parts over the last five years is not surprising.
As a next step, we compared Genuine Parts' 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 21% in the same period.
Earnings growth is a huge factor in stock valuation. 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. What is GPC worth today? The intrinsic value infographic in our free research report helps visualize whether GPC is currently mispriced by the market.
Is Genuine Parts Efficiently Re-investing Its Profits?
Genuine Parts' three-year median payout ratio is a pretty moderate 43%, meaning the company retains 57% of its income. By the looks of it, the dividend is well covered and Genuine Parts is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Additionally, Genuine Parts 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 40% of its profits over the next three years. Accordingly, forecasts suggest that Genuine Parts' future ROE will be 26% which is again, similar to the current ROE.
Summary
Overall, we are quite pleased with Genuine Parts' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
