Looking at Fortive’s (NYSE:FTV) recent performance, where its stock has dropped 2.7% in the last month, it is difficult to be optimistic. Although the company’s fundamentals appear to be solid, long-term financials typically correlate with future changes in market price. Today, our focus will be on Fortive’s ROE in particular.
A shareholder should take into account the return on equity (ROE), which indicates how well their money is being reinvested. In a nutshell, it’s used to evaluate a company’s profitability in relation to its equity capital.
Net profit (from ongoing operations) minus shareholders’ equity equals return on equity.
Therefore, using the calculation above, the ROE for Fortive is:
Based on the trailing twelve months through June 2023, 8.0% equals US$800m to US$10.0b.
The amount earned post-tax over the previous twelve months is the “return.” One way to think about this is that the corporation produced $0.08 in profit for every $1 of shareholder capital.
As of now, we know that ROE is a gauge of a business’s profitability. We may then determine a company’s potential for earnings growth based on how well and how much of these profits it reinvests, or “retains”. Assuming all other factors remain constant, a company’s growth rate will be stronger compared to businesses that don’t necessarily exhibit these traits, the higher its ROE and profit retention.
Fortive’s ROE doesn’t seem like much on the surface. A cursory investigation reveals that the company’s ROE does not favourably contrast with the industry average of 14%. Fortive nonetheless managed to have a respectable 7.0% net income growth during the previous five years. We believe that there might be additional elements at work here. For instance, the business is managed well or has a low payout ratio.
The company’s reported growth is comparable to the industry’s average growth rate over the past several years, which has been 8.2%, when we next compared Fortive’s net income growth with the sector.
When valuing a stock, earnings growth is a crucial factor to take into account. The investor should try to determine whether the predicted earnings increase or reduction, as the case may be, is already priced in. They can determine whether the stock’s future appears good or concerning by doing this. Has the market factored in the prospects for FTV in the future? In our most recent infographic research report on intrinsic value, you can learn more.
Fortive’s instance, its low three-year median payout ratio of 13% (or a retention ratio of 87%), which implies that the company is investing the majority of its profits to build its business, can likely be used to explain its respectable earnings growth.
Furthermore, Fortive has paid dividends for the past seven years, demonstrating the company’s commitment to returning profits to shareholders. According to the most recent analyst data, during the following three years, the company’s prospective payout ratio is predicted to fall to 7.3%. As a result, the anticipated decline in Fortive’s payout ratio explains why the company’s ROE is forecast to increase to 12% during the same time period.
Overall, it appears that Fortive’s business does have certain advantages. The corporation has reported remarkable earnings growth despite the low rate of return due to significant business reinvestment. Having said that, the most recent industry expert predictions show that the company’s earnings are anticipated to increase. View the company’s projected earnings growth estimates to learn more.