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Is a strong financial outlook the force driving momentum in WW Grainger, Inc. (NYSE:GWW) stock?
WW Grainger (NYSE:GWW) has had a great run in the stock market with its shares up a significant 7.5% over the past month. Given that the market rewards strong financials over the long term, we wondered if that is the case in this case. In this article, we decided to focus on WW Grainger’s ROE.
ROE or return on equity is a useful tool for assessing how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit each dollar generates in relation to its shareholders’ investments.
See our latest analysis for WW Grainger
How to calculate return on equity?
O formula for return on equity It is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for WW Grainger is:
54% = $1.9 billion ÷ $3.5 billion (based on the last twelve months to March 2024).
The ‘return’ is the amount earned after taxes over the last twelve months. This means that for every $1 of shareholders’ equity, the company generated $0.54 in profit.
Why is ROE important for earnings growth?
So far, we’ve 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 can then assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of WW Grainger’s earnings growth and 54% ROE
For starters, WW Grainger has a very high ROE, which is interesting. Secondly, even when compared to the industry average of 17%, the company’s ROE is quite impressive. As a result, WW Grainger’s exceptional 22% net income growth seen over the past five years comes as no surprise.
We then compared WW Grainger’s net income growth with the industry, which revealed that the company’s growth is similar to the industry average growth of 25% over the same 5-year period.
past-earnings-growth
The basis for assigning value to a company is largely tied to its earnings growth. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the stock price. This helps them determine whether the stock is positioned for a bright or bleak future. If you’re wondering about WW Grainger’s valuation, check out this indicator of your price/earnings ratiocompared to its sector.
The story continues
Is WW Grainger reinvesting its profits efficiently?
WW Grainger’s three-year median payout ratio to shareholders is 24%, which is quite low. This implies that the company is retaining 76% of its profits. This suggests that management is reinvesting most of the profits to grow the business, as evidenced by the growth seen by the company.
Furthermore, WW Grainger has paid dividends for at least a decade, which means the company is serious about sharing its profits with shareholders. By studying the most recent analyst consensus data, we found that the company is expected to continue paying out approximately 20% of its profits over the next three years.
Summary
Overall, we feel that WW Grainger has performed very well. 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 being said, a study of the latest analyst forecasts shows that the company is expected to see a slowdown in its future earnings growth. To learn more about the company’s future earnings growth forecasts, take a look at 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 with us directly. Alternatively, send an email editorial-team@simplywallst.com