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Is Agilent Technologies, Inc.'s (NYSE:A) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

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Simply Wall St
·4 min read
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Agilent Technologies' (NYSE:A) stock is up by a considerable 20% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Agilent Technologies' ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Agilent Technologies

How Do You 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 Agilent Technologies is:

15% = US$719m ÷ US$4.9b (Based on the trailing twelve months to October 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.15 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Agilent Technologies' Earnings Growth And 15% ROE

To begin with, Agilent Technologies seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 15%. This probably goes some way in explaining Agilent Technologies' moderate 15% growth over the past five years amongst other factors.

As a next step, we compared Agilent Technologies' 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%.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Agilent Technologies is trading on a high P/E or a low P/E, relative to its industry.

Is Agilent Technologies Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 31% (implying that the company retains 69% of its profits), it seems that Agilent Technologies is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Agilent Technologies has been paying dividends over a period of nine years. 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 drop to 19% over the next three years. As a result, the expected drop in Agilent Technologies' payout ratio explains the anticipated rise in the company's future ROE to 26%, over the same period.

Conclusion

In total, we are pretty happy with Agilent Technologies' 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. 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.

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