UK markets close in 1 hour 32 minutes
  • FTSE 100

    7,512.48
    -23.58 (-0.31%)
     
  • FTSE 250

    20,125.19
    -211.22 (-1.04%)
     
  • AIM

    925.37
    -6.17 (-0.66%)
     
  • GBP/EUR

    1.1870
    -0.0019 (-0.16%)
     
  • GBP/USD

    1.2072
    -0.0023 (-0.19%)
     
  • BTC-GBP

    19,414.36
    -484.23 (-2.43%)
     
  • CMC Crypto 200

    554.92
    -17.89 (-3.12%)
     
  • S&P 500

    4,276.50
    -28.70 (-0.67%)
     
  • DOW

    33,964.90
    -187.11 (-0.55%)
     
  • CRUDE OIL

    86.81
    +0.28 (+0.32%)
     
  • GOLD FUTURES

    1,783.00
    -6.70 (-0.37%)
     
  • NIKKEI 225

    29,222.77
    +353.86 (+1.23%)
     
  • HANG SENG

    19,922.45
    +91.93 (+0.46%)
     
  • DAX

    13,668.11
    -242.01 (-1.74%)
     
  • CAC 40

    6,533.36
    -59.22 (-0.90%)
     

Cintas Corporation's (NASDAQ:CTAS) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

  • Oops!
    Something went wrong.
    Please try again later.
·3-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

With its stock down 12% over the past three months, it is easy to disregard Cintas (NASDAQ:CTAS). 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 Cintas' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Cintas

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Cintas is:

37% = US$1.2b ÷ US$3.3b (Based on the trailing twelve months to February 2022).

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 $0.37.

Why Is ROE Important For 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. 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.

Cintas' Earnings Growth And 37% ROE

Firstly, we acknowledge that Cintas has a significantly high ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. This likely paved the way for the modest 16% net income growth seen by Cintas over the past five years. growth

Next, on comparing with the industry net income growth, we found that Cintas' growth is quite high when compared to the industry average growth of 6.9% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is CTAS worth today? The intrinsic value infographic in our free research report helps visualize whether CTAS is currently mispriced by the market.

Is Cintas Using Its Retained Earnings Effectively?

Cintas has a three-year median payout ratio of 30%, which implies that it retains the remaining 70% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Cintas has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 33% of its profits over the next three years. Accordingly, forecasts suggest that Cintas' future ROE will be 37% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Cintas' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting