Thermo Fisher Scientific Inc.'s (NYSE:TMO) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
It is hard to get excited after looking at Thermo Fisher Scientific's (NYSE:TMO) recent performance, when its stock has declined 5.5% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Thermo Fisher Scientific's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Thermo Fisher Scientific
How Do You Calculate Return On Equity?
Return on equity 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 Thermo Fisher Scientific is:
14% = US$6.0b ÷ US$42b (Based on the trailing twelve months to April 2023).
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 $0.14 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Thermo Fisher Scientific's Earnings Growth And 14% ROE
To start with, Thermo Fisher Scientific's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This certainly adds some context to Thermo Fisher Scientific's exceptional 24% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
We then performed a comparison between Thermo Fisher Scientific's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 24% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Thermo Fisher Scientific's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Thermo Fisher Scientific Efficiently Re-investing Its Profits?
Thermo Fisher Scientific's ' three-year median payout ratio is on the lower side at 5.8% implying that it is retaining a higher percentage (94%) of its profits. So it looks like Thermo Fisher Scientific is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Thermo Fisher Scientific 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 is expected to keep paying out approximately 4.9% of its profits over the next three years. Still, forecasts suggest that Thermo Fisher Scientific's future ROE will rise to 23% even though the the company's payout ratio is not expected to change by much.
Conclusion
Overall, we are quite pleased with Thermo Fisher Scientific'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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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