The Procter & Gamble Company's (NYSE:PG) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong? - Simply Wall St - Financial Daily News Site

The Procter & Gamble Company's (NYSE:PG) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong? – Simply Wall St

Procter & Gamble (NYSE:PG) has had a rough month with its share price down 11%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Procter & Gamble’s ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

Check out our latest analysis for Procter & Gamble

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Procter & Gamble is:

32% = US$15b ÷ US$46b (Based on the trailing twelve months to March 2022).

The ‘return’ is the income the business earned over the last year. That means that for every $1 worth of shareholders’ equity, the company generated $0.32 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Procter & Gamble’s Earnings Growth And 32% ROE

Firstly, we acknowledge that Procter & Gamble has a significantly high ROE. Secondly, even when compared to the industry average of 20% the company’s ROE is quite impressive. This likely paved the way for the modest 10% net income growth seen by Procter & Gamble over the past five years. growth

Next, on comparing Procter & Gamble’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 9.1% in the same period.

past-earnings-growth
NYSE:PG Past Earnings Growth May 26th 2022

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for PG? You can find out in our latest intrinsic value infographic research report.

Is Procter & Gamble Making Efficient Use Of Its Profits?

While Procter & Gamble has a three-year median payout ratio of 59% (which means it retains 41% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn’t hampered its ability to grow.

Moreover, Procter & Gamble is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 56%. Accordingly, forecasts suggest that Procter & Gamble’s future ROE will be 38% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Procter & Gamble’s performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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