UK markets closed
  • NIKKEI 225

    27,362.75
    -32.26 (-0.12%)
     
  • HANG SENG

    22,566.78
    +522.13 (+2.37%)
     
  • CRUDE OIL

    81.10
    +0.95 (+1.19%)
     
  • GOLD FUTURES

    1,929.70
    -12.90 (-0.66%)
     
  • DOW

    33,949.41
    +205.57 (+0.61%)
     
  • BTC-GBP

    18,607.82
    -425.46 (-2.24%)
     
  • CMC Crypto 200

    523.89
    -3.30 (-0.63%)
     
  • ^IXIC

    11,512.41
    +199.06 (+1.76%)
     
  • ^FTAS

    4,253.35
    +11.50 (+0.27%)
     

The Estée Lauder Companies Inc.'s (NYSE:EL) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Estée Lauder Companies (NYSE:EL) has had a rough three months with its share price down 15%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Estée Lauder Companies' ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Estée Lauder Companies

How Do You Calculate Return On Equity?

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 Estée Lauder Companies is:

35% = US$2.2b ÷ US$6.3b (Based on the trailing twelve months to September 2022).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.35 in profit.

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.

Estée Lauder Companies' Earnings Growth And 35% ROE

Firstly, we acknowledge that Estée Lauder Companies has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 18% also doesn't go unnoticed by us. This likely paved the way for the modest 18% net income growth seen by Estée Lauder Companies over the past five years. growth

We then performed a comparison between Estée Lauder Companies' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 18% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for EL? You can find out in our latest intrinsic value infographic research report.

Is Estée Lauder Companies Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 35% (implying that the company retains 65% of its profits), it seems that Estée Lauder Companies is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Estée Lauder Companies has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 38%. Still, forecasts suggest that Estée Lauder Companies' future ROE will rise to 56% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we are quite pleased with Estée Lauder Companies' 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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here