Most readers already know that Fastenal (NASDAQ: FAST) stock has risen 5.9% in the past three months. Given its impressive performance, we decided to study the company’s key financial metrics, as a company’s long-term fundamentals usually dictate market results. In particular, we will be paying close attention to Fastenal’s ROE today.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest analysis for Fastenal
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Fastenal’s ROE is:
30% = US $ 868 million ÷ US $ 2.9 billion (based on the last twelve months to June 2021).
The “return” is the income the business has earned over the past year. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.30 in profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Fastenal’s profit growth and 30% ROE
First of all, we love that Fastenal has an impressive ROE. Second, even compared to the industry average of 15%, the company’s ROE is quite impressive. This likely paved the way for the modest 13% net income growth seen by Fastenal over the past five years. growth
In the next step, we compared Fastenal’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 13% over the past year. same period.
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Fastenal is trading high P / E or low P / E, relative to its industry.
Is Fastenal Efficiently Reinvesting Its Profits?
While Fastenal has a three-year median payout rate of 63% (meaning it keeps 37% of profits), the company has still seen good profit growth in the past, which means its rate high distribution did not hinder his ability to grow taller.
In addition, Fastenal is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 70% of its profits over the next three years. As a result, forecasts suggest that Fastenal’s future ROE will be 32%, which is again similar to the current ROE.
All in all, we are quite satisfied with the performance of Fastenal. In particular, its high ROE is quite remarkable and also the probable explanation for the considerable growth in its profits. Yet the company retains a small portion of its profits. Which means the company was able to increase its profits despite this, so it’s not that bad. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to be redirected to our business analyst forecasts page.
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