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Is Becton, Dickinson and Company's (NYSE:BDX) Recent Performancer Underpinned By Weak Financials?

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Simply Wall St
·4 min read
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With its stock down 3.6% over the past three months, it is easy to disregard Becton Dickinson (NYSE:BDX). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Becton Dickinson'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Becton Dickinson

How Is ROE Calculated?

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 Becton Dickinson is:

6.5% = US$1.6b ÷ US$25b (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.06 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.

Becton Dickinson's Earnings Growth And 6.5% ROE

When you first look at it, Becton Dickinson's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 12% either. Therefore, Becton Dickinson's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Becton Dickinson's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is BDX fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Becton Dickinson Efficiently Re-investing Its Profits?

Becton Dickinson's very high three-year median payout ratio of 105% suggests that the company is paying its shareholders more than what it is earning. The absence of growth in Becton Dickinson's earnings therefore, doesn't come as a surprise. Paying a dividend beyond their means is usually not viable over the long term. This is quite a risky position to be in. Our risks dashboard should have the 3 risks we have identified for Becton Dickinson.

In addition, Becton Dickinson has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 29% over the next three years. As a result, the expected drop in Becton Dickinson's payout ratio explains the anticipated rise in the company's future ROE to 15%, over the same period.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Becton Dickinson. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

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.

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