Looking at Renishaw’s (LON:RSW) recent performance, it’s hard to get excited about it, with the share price down 6.2% in the last three months. However, share prices are usually driven by a company’s long term financial performance, which in this case looks very promising. Specifically, we decided to look at Renishaw’s ROE in this article.
Return on Equity (ROE) is a measure of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to evaluate a company’s profitability relative to its own capital.
View Renishaw’s latest analysis
How do you calculate return on equity?
of ROE formula teeth:
Return on Equity = Net Income (from continuing operations) / Shareholders’ Equity
So, based on the above formula, Renishaw’s ROE is:
11% = GBP97m ÷ GBP867m (Based on the trailing twelve months to December 2023).
The ‘return’ refers to annual profit, meaning that for every £1 of shareholder investment, the company generates £0.11 in profit.
What is the relationship between ROE and profit growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits a company chooses to reinvest or “retain”, we are then able to evaluate a company’s future profit-generating ability. Assuming all else remains constant, the higher the ROE and retained profits, the higher a company’s growth rate will be relative to companies that don’t necessarily have these characteristics.
Renishaw’s revenue growth and 11% ROE
At first glance, Renishaw’s ROE looks decent. It compares favorably to the industry average of 11%. This certainly supports the fact that Renishaw’s net profit growth over the past five years has been modest at 12%.
Next, we compare Renishaw’s net income growth with the industry and find that the company’s reported growth is in line with the industry average growth rate of 12% over the past few years.
The yardstick for assessing a company’s value has a lot to do with its earnings growth. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already priced into the stock price. Doing so will tell them whether the stock is heading into brighter waters or swampy waters await. 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 outlook. Therefore, Find out if Renishaw is trading at a high or low P/Ecompared to its industry.
Is Renishaw using its profits efficiently?
Renishaw’s three-year median dividend payout ratio is 44%, meaning that it retains 56% of its remaining profits. This suggests that the dividend is well covered, and given the company’s steady growth, it looks like management is reinvesting profits efficiently.
Additionally, Renishaw has been paying dividends for at least 10 years, which shows that the company is committed to sharing profits with shareholders. After studying the latest analyst consensus data, the company is expected to continue paying out around 49% of its profits in dividends over the next three years. Therefore, with analysts predicting the company’s future ROE to be 13%, the company’s ROE is also not expected to change much.
Conclusion
Overall, we feel that Renishaw is performing very well. In particular, it’s great to see the company investing heavily in its business, which coupled with a high rate of return has led to strong revenue growth. With that in mind, the latest analyst forecasts suggest that the company’s revenue is expected to continue to grow. You can find out more about the latest analyst forecasts for the company here. Visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.