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Could the market be wrong about Intuit Inc. (NASDAQ:INTU) given its attractive financial outlook?
Intuit (NASDAQ:INTU) has had a tough month with its stock price falling 3.6%. But if you pay close attention, you may notice that its strong financials could mean the stock could potentially see a rise in value in the long term, given how markets generally reward companies with good financial health. In this article, we decided to focus on Intuit’s ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess a company’s profitability relative to its equity capital.
Check out our latest analysis for Intuit
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the above formula, Intuit’s ROE is:
16% = $3.1 billion ÷ $19 billion (based on the last twelve months to April 2024).
The “return” refers to a company’s profits over the past year. This means that for every $1 of shareholders’ equity, the company generated $0.16 in profit.
Why is ROE important for earnings growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have a higher return on equity and higher profit retention are generally those that have a higher growth rate when compared to companies that do not have the same characteristics.
Intuit’s earnings growth and 16% ROE
For starters, Intuit’s ROE looks acceptable. Compared to the industry average ROE of 12%, the company’s ROE looks quite remarkable. This likely set the stage for Intuit’s moderate 12% net income growth seen over the past five years.
As a next step, we compared Intuit’s net income growth to the industry and found that the company has a similar growth number when compared to the industry average growth rate of 13% over the same period.
past-earnings-growth
Earnings growth is an important metric to consider when evaluating a stock. An investor should try to establish whether the expected growth or decline in earnings, whichever the case may be, is priced in. This will help them establish whether the stock’s future looks promising or threatening. Has the market priced in the future outlook for INTU? You can find out at our latest infographic research report on intrinsic value.
The story continues
Is Intuit using its retained earnings effectively?
Intuit has a healthy combination of a moderate three-year average payout ratio of 34% (or a retention rate of 66%) and respectable earnings growth, as we saw above, which means the company has been making efficient use of its profits.
Furthermore, Intuit has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Current analyst estimates suggest that the company’s future payout ratio is expected to fall to 21% in the next three years. Consequently, the expected decline in the payout ratio explains the expected increase in the company’s ROE to 26% over the same period.
Summary
Overall, we’re very happy with Intuit’s performance. Specifically, we like that the company is reinvesting a large portion of its profits at a high rate of return. This, of course, has led to the company seeing substantial growth in its earnings. That said, the latest forecasts from industry analysts reveal that the company’s earnings are expected to accelerate. To learn more about the company’s future earnings growth forecasts, check out this free report analysts’ forecasts so the company knows more.
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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 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 into account your objectives or financial situation. Our aim is to bring you long-term focused analysis, driven by fundamental data. Please 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 stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email editorial-team@simplywallst.com