DuPont de Nemours' (NYSE:DD) stock up by 2.8% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study DuPont de Nemours' ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How To Calculate Return On Equity?
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 DuPont de Nemours is:
1.5% = US$350m ÷ US$24b (Based on the trailing twelve months to June 2024).
The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.01.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
DuPont de Nemours' Earnings Growth And 1.5% ROE
It is hard to argue that DuPont de Nemours' ROE is much good in and of itself. Even when compared to the industry average of 9.6%, the ROE figure is pretty disappointing. Despite this, surprisingly, DuPont de Nemours saw an exceptional 46% net income growth over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.
As a next step, we compared DuPont de Nemours' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 13%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is DD fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is DuPont de Nemours Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 65% (implying that it keeps only 35% of profits) for DuPont de Nemours suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Additionally, DuPont de Nemours has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 36% over the next three years. As a result, the expected drop in DuPont de Nemours' payout ratio explains the anticipated rise in the company's future ROE to 8.0%, over the same period.
Conclusion
In total, it does look like DuPont de Nemours has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
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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.
