Most readers know that Kenvue’s stock increased 11% last month. We did, however, want to take a deeper look at its leading financial indicators because markets often pay for long-term fundamentals, which, in this case,e are not particularly encouraging. We will be paying close attention to Kenvue’s ROE today. Return on Equity, or ROE, measures how well a firm grows its value and manages investor money. Put another way, it demonstrates the company’s ability to convert shareholder capital into profits.
How is ROE calculated?
Return on Equity (ROE) is calculated as Net Profit (from ongoing operations) ÷ Shareholders’ Equity. So, using the calculation above, Kenvue’s ROE is 11%, which equals US$1.0 billion divided by US$9.7 billion. The ‘ return’ is the amount earned after taxes for twelve months. One way to think about this is that for every $1 of shareholder capital, the firm generated $0.11 in profit.
What Does ROE Have To Do With Earnings Growth?
We’ve previously proven that ROE is an effective profit-generating indicator for a company’s future earnings. We must now determine how much earnings the firm reinvests or “retains” for future growth, which provides insight into the company’s growth potential. Assuming all else is equal, firms with a greater return on equity and higher profit retention tend to have a faster growth rate than companies that lack both characteristics.
A side-by-side comparison of Kenvue’s earnings growth and 11% ROE:
At first sight, Kenvue’s ROE is not very promising. However, considering that the company’s ROE is comparable to the industry average of 11%, we may overlook it. Kenvue, on the other hand, recorded a mild 6.5% increase in net income during the previous five years. Given the relatively low ROE, other factors will likely affect the company’s profit growth. For example, it is feasible that the firm’s management made sound strategic decisions or that the company has a low payout ratio.
Is Kenvue effectively utilizing its retained earnings?
Kenvue has a high three-year median payout ratio of 107%, indicating that the company’s shareholders are compensated for more than its earnings. Despite this, the company’s earnings increased respectably, as seen above. However, the high payout ratio is something we would keep an eye on if the firm is unable to maintain its development or if business conditions worsen. To learn about the four hazards we found for Kenvue, please visit our risk dashboard for free. Along with increased earnings, Kenvue has only lately begun paying dividends. IThe corporation probably wantedto impress its shareholders.Â
