Yahoo Finance Is Snap-on Incorporated's (NYSE:SNA) Recent Stock Performance Tethered To Its Strong Fundamentals?
Snap-on's (NYSE:SNA) stock is up by a considerable 14% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Snap-on's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Snap-on
How Do You Calculate Return On Equity?
ROE 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 Snap-on is:
21% = US$966m ÷ US$4.6b (Based on the trailing twelve months to April 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.21 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Snap-on's Earnings Growth And 21% ROE
To start with, Snap-on's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 13%. Probably as a result of this, Snap-on was able to see a decent growth of 8.7% over the last five years.
We then performed a comparison between Snap-on's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.3% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. What is SNA worth today? The intrinsic value infographic in our free research report helps visualize whether SNA is currently mispriced by the market.
Is Snap-on Making Efficient Use Of Its Profits?
Snap-on has a healthy combination of a moderate three-year median payout ratio of 34% (or a retention ratio of 66%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Snap-on 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 over the next three years is expected to be approximately 40%. Accordingly, forecasts suggest that Snap-on's future ROE will be 18% which is again, similar to the current ROE.
Summary
Overall, we are quite pleased with Snap-on's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
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