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Shares of Patterson Companies (NASDAQ:PDCO) are up 6. 7% in the past month. Since the market rewards strong monetary corporations over the long term, we wonder if this is the case in this case. In this article, we have to focus on the ROE of Patterson Companies.
ROE or retracement on equity is a useful tool for assessing how well a company can generate returns on the investment it has earned from its shareholders. In short, ROE shows the benefit that the dollar generates relative to its shareholders’ investments.
Check out our latest research for Patterson companies
The formula for return on equity is:
Return on Equity = Net Income (from Continuing Operations) ÷ Stockholders’ Equity
So, based on the above formula, the ROE for Patterson Companies is:
19% = $200 million ÷ $1. 1 billion (based on the last twelve months through October 2023).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.19 in profit.
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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 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.
For starters, Patterson Companies’ ROE seems acceptable. Especially when compared to the industry average of 11%, the company’s ROE looks impressive. In fact, this adds some context to the exceptional 28% net expansion of Patterson Companies’ revenue source seen over the past five years. However, this expansion may also have other causes. For example, the company has a low payout ratio or is efficiently controlled.
Then, comparing it to the sector’s net source of revenue expansion, we found that the Patterson corporations’ expansion is higher compared to the industry’s average expansion of 8. 5% over the same period, which is wonderful to see.
The basis on which to price a company is, to a large extent, similar to the growth of its profits. The investor should check whether the expected increase or decrease in profits, whatever the case may be, is taken into account. So, this helps you determine whether the stock is poised for a bright or bleak future. Are Patterson companies well priced compared to other companies? These three valuation measures can also help you make a decision.
Patterson Companies has a significant three-year median payout ratio of 51%, meaning the company only retains 49% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
In addition, Patterson Companies has been paying dividends for at least ten years, if not longer. This shows that the company is committed to sharing profits with its shareholders. Looking at the latest consensus data from analysts, we found that the company’s long-term payout ratio is expected to fall to 40% in the next three years. Despite the lower expected payout ratio, the company’s ROE is expected to increase significantly.
Overall, we find the functionality of Patterson Companies to be pretty good. Especially the superior ROE, which contributed to the impressive earnings growth. Although the company only reinvested a small portion of its profits, it still managed to increase its profits appreciably. That said, an examination of analysts’ latest forecasts shows that the company will most likely experience a slowdown in earnings growth over the long term. To learn more about the latest analyst forecasts for the company, check out this visualization of analysts’ forecasts for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.