Most readers already know that shares of Fortive (NYSE:FTV) are up a significant 11% in the past three months. However, we wonder if the company’s inconsistent financial statements would negatively impact the current share price dynamics. In particular, we’ll be paying attention to Fortive’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Fortive
How is ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Fortive is:
7.0% = $659 million ÷ $9.4 billion (based on trailing 12 months to July 2022).
The “yield” is the profit of the last twelve months. This means that for every dollar of shareholders’ equity, the company generated $0.07 in profit.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Fortive’s earnings growth and 7.0% ROE
At first glance, Fortive’s ROE doesn’t look very promising. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 13%. As a result, Fortive has experienced very low revenue growth of 2.5% over the past five years.
As a next step, we benchmarked Fortive’s net income growth against the industry and were disappointed to see that the company’s growth was below the industry average growth of 8.4% over the course of the same period.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. Is the FTV correctly valued? This intrinsic business value infographic has everything you need to know.
Does Fortive effectively reinvest its profits?
Fortive’s low three-year median payout ratio of 10.0% (or a 90% retention rate) should mean the company retains most of its earnings to fuel growth. That should be reflected in its earnings growth number, but it’s not. Therefore, there could be other reasons for the lack in this regard. For example, the business might be in decline.
Moreover, Fortive has been paying dividends for six years, which is a considerable period of time, suggesting that management must have perceived that shareholders preferred dividends to earnings growth. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out around 10% of its earnings over the next three years. However, Fortive’s ROE is expected to reach 13% despite no expected change in its payout ratio.
All in all, we’re a bit ambivalent about Fortive’s performance. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization 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 only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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