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Could the market be wrong about Renishaw plc (LON:RSW) given its attractive financial prospects?
It’s hard to get excited after looking at Renishaw’s (LON:RSW) recent performance, when its shares are down 6.2% in the last three months. However, share prices are generally driven by a company’s long-term financial performance, which in this case looks quite promising. Specifically, we decided to study Renishaw ROE in this article.
Return on equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to evaluate the profitability of a company in relation to its share capital.
See our latest analysis for Renishaw
How do you calculate return on equity?
O formula for ROE It is:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, Renishaw’s ROE is:
11% = £97m ÷ £867m (Based on trailing twelve months to December 2023).
The ‘return’ is the annual profit. Therefore, this means that for every £1 of investment by its shareholders, the company generates a profit of £0.11.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we can then assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Renishaw profit growth and ROE of 11%
At first glance, Renishaw appears to have a decent ROE. Even when compared to the industry average of 11%, the company’s ROE looks pretty decent. This certainly adds some context to Renishaw’s moderate 12% net profit growth seen over the last five years.
Next, when comparing Renishaw’s net profit growth to that of the industry, we find that the company’s reported growth is similar to the industry’s average growth rate of 12% in recent years.
past profit growth
The basis for adding value to a company is, to a large extent, linked to the growth of its profits. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already factored into the stock price. By doing so, they will get an idea of whether the stock is headed for clear blue waters or if swampy waters await. A 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 might want check if Renishaw is trading on a high or low P/Ein relation to your sector.
The story continues
Is Renishaw making efficient use of its profits?
Renishaw has a three-year average payout ratio of 44%, which implies it retains the remaining 56% of its profits. This suggests that its dividends are well covered, and given the decent growth seen by the company, it appears that management is reinvesting its profits efficiently.
Furthermore, Renishaw has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. By studying the latest analyst consensus data, we found that the company is expected to continue to pay out approximately 49% of its earnings over the next three years. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 13%.
Conclusion
Overall, we feel Renishaw’s performance has been very good. In particular, it is great to see that the company is investing heavily in its business and, together with a high rate of return, this has resulted in considerable growth in its profits. Therefore, the latest analyst forecasts show that the company will continue to record an expansion in its profits. To learn more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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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 your financial situation. Our goal 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 materials. Simply Wall St has no position in any of the stocks mentioned.