Yahoo Finance General Electric Company's (NYSE:GE) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
General Electric (NYSE:GE) has had a great run on the share market with its stock up by a significant 40% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to General Electric's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for General Electric
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for General Electric is:
32% = US$9.0b ÷ US$29b (Based on the trailing twelve months to December 2023).
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 $0.32 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
A Side By Side comparison of General Electric's Earnings Growth And 32% ROE
Firstly, we acknowledge that General Electric has a significantly high ROE. Further, even comparing with the industry average if 28%, the company's ROE is quite respectable. Therefore, it might not be wrong to say that the impressive five year 55% net income growth seen by General Electric was probably achieved as a result of the high ROE.
As a next step, we compared General Electric's 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 41%.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for GE? You can find out in our latest intrinsic value infographic research report.
Is General Electric Efficiently Re-investing Its Profits?
General Electric's ' three-year median payout ratio is on the lower side at 3.3% implying that it is retaining a higher percentage (97%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Besides, General Electric 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's future payout ratio is expected to rise to 5.1% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 22%) over the same period.
Summary
Overall, we are quite pleased with General Electric's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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 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.