U.S. Markets closed
  • S&P 500

    4,662.85
    +3.82 (+0.08%)
     
  • Dow 30

    35,911.81
    -201.79 (-0.56%)
     
  • Nasdaq

    14,893.75
    +86.95 (+0.59%)
     
  • Russell 2000

    2,162.46
    +3.02 (+0.14%)
     
  • Crude Oil

    83.83
    +0.01 (+0.01%)
     
  • Gold

    1,820.60
    +4.10 (+0.23%)
     
  • Silver

    23.07
    +0.15 (+0.66%)
     
  • EUR/USD

    1.1416
    0.0000 (-0.0000%)
     
  • 10-Yr Bond

    1.7720
    +0.0610 (+3.57%)
     
  • Vix

    19.19
    -1.12 (-5.51%)
     
  • GBP/USD

    1.3661
    -0.0019 (-0.1366%)
     
  • USD/JPY

    114.5090
    +0.3090 (+0.2706%)
     
  • BTC-USD

    42,741.36
    -277.55 (-0.65%)
     
  • CMC Crypto 200

    1,026.34
    +0.61 (+0.06%)
     
  • FTSE 100

    7,590.04
    +47.09 (+0.62%)
     
  • Nikkei 225

    28,333.52
    +209.24 (+0.74%)
     

Is Donaldson Company, Inc.'s (NYSE:DCI) Latest Stock Performance A Reflection Of Its Financial Health?

  • Oops!
    Something went wrong.
    Please try again later.
·4 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Donaldson Company's (NYSE:DCI) stock is up by a considerable 5.7% over the past month. 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 Donaldson Company's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Donaldson Company

How Is ROE Calculated?

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 Donaldson Company is:

23% = US$246m ÷ US$1.1b (Based on the trailing twelve months to January 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.23 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. 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.

A Side By Side comparison of Donaldson Company's Earnings Growth And 23% ROE

First thing first, we like that Donaldson Company has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. Probably as a result of this, Donaldson Company was able to see a decent net income growth of 7.5% over the last five years.

We then performed a comparison between Donaldson Company's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 7.9% in the same period.

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. Is Donaldson Company fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Donaldson Company Efficiently Re-investing Its Profits?

Donaldson Company has a healthy combination of a moderate three-year median payout ratio of 42% (or a retention ratio of 58%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Donaldson Company is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 29% over the next three years. The fact that the company's ROE is expected to rise to 33% over the same period is explained by the drop in the payout ratio.

Summary

In total, we are pretty happy with Donaldson Company'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, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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 (at) simplywallst.com.