Church & Dwight (NYSE:CHD) has been doing well on the stock market, with its stock up a significant 10% over the past three months. Considering that stock prices are typically in line with a company's financial performance over the long term, we take a closer look at financial indicators to see if they are influencing recent stock price movements. I made it. Specifically, we decided to study Church & Dwight's ROE in this article.
Return on equity or ROE is a key measure used to evaluate how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company's shareholders.
Check out our latest analysis on Church and Dwight
How is ROE calculated?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Church & Dwight's ROE is:
20% = USD 756 million ÷ USD 3.9 billion (based on trailing twelve months to December 2023).
“Return” refers to a company's earnings over the past year. Another way to think of it is that for every $1 worth of stock, the company could earn him $0.20 in profit.
What is the relationship between ROE and profit growth rate?
So far, we have learned that ROE measures how efficiently a company is generating its profits. We are then able to evaluate a company's future ability to generate profits based on how much of its profits it chooses to reinvest or “retain”. Generally, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
A side-by-side comparison of Church and Dwight's earnings growth and 20% ROE.
First, Church & Dwight's ROE looks acceptable. Despite this, the company's ROE is still significantly lower than the industry average of 26%. Furthermore, Church & Dwight's earnings have been flat over the past five years, which doesn't paint a very positive picture. Note that the company has a respectable level of ROE. It's just that the industry's ROE is high. So there could be some other aspects that are causing flat revenue growth. For example, if a company pays out a large portion of its earnings as dividends or if it faces competitive pressures.
Next, when we compare it to the industry's net income growth, we find that the growth rate reported by Church & Dwight is slightly lower than the industry's growth rate of 1.5% over the past few years.
Earnings growth is an important metric to consider when evaluating a stock. Investors should check whether expected growth or decline in earnings has been factored in in any case. This will help you determine whether the stock's future is bright or bleak. What is CHD worth today? The intrinsic value infographic in our free research report helps you visualize whether CHD is currently mispriced by the market.
Is Church & Dwight using its profits efficiently?
Despite a typical three-year median payout ratio of 32% (or a retention rate of 68%), Church & Dwight's earnings haven't grown much. Therefore, there may be other explanations in this regard. For example, your company may be underperforming.
Furthermore, Church & Dwight has been paying dividends for at least 10 years, suggesting that continuing to pay dividends is far more important to management, even if it comes at the expense of business growth. According to our latest analyst data, the company's future payout ratio over the next three years is expected to be around 31%. As a result, Church & Dwight's ROE is not expected to change much, based on analysts' future ROE expectations of 21%.
conclusion
Overall, we feel that Church and Dwight certainly have some positive elements to consider. However, the lower earnings growth is a bit concerning, especially given that the company has a respectable rate of return and reinvests a large portion of its profits. There may be other factors inhibiting growth that are not necessarily in control of your business at first glance. If so, analysts expect the company's profit growth rate to improve significantly, according to the latest industry analyst forecasts. Are these analyst forecasts based on broader expectations for the industry, or are they based on the company's fundamentals? Click here to be taken to our analyst forecasts page for the company .
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
