Oil-Dri Corporation of America's (NYSE:ODC) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?
Oil-Dri Corporation of America (NYSE:ODC) has had a great run on the share market with its stock up by a significant 16% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Oil-Dri Corporation of America's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Oil-Dri Corporation of America
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Oil-Dri Corporation of America is:
0.7% = US$980k ÷ US$146m (Based on the trailing twelve months to April 2022).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.01 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Oil-Dri Corporation of America's Earnings Growth And 0.7% ROE
It is hard to argue that Oil-Dri Corporation of America's ROE is much good in and of itself. Even compared to the average industry ROE of 20%, the company's ROE is quite dismal. Hence, the flat earnings seen by Oil-Dri Corporation of America over the past five years could probably be the result of it having a lower ROE.
As a next step, we compared Oil-Dri Corporation of America'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 7.6% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for ODC? You can find out in our latest intrinsic value infographic research report
Is Oil-Dri Corporation of America Using Its Retained Earnings Effectively?
In spite of a normal three-year median payout ratio of 48% (or a retention ratio of 52%), Oil-Dri Corporation of America hasn't seen much growth in its earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Moreover, Oil-Dri Corporation of America has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Summary
In total, we're a bit ambivalent about Oil-Dri Corporation of America's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into Oil-Dri Corporation of America's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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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