Is PayPal Holdings, Inc.’s (NASDAQ:PYPL) latest stock performance a reflection of its financial health?

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Most readers will already know that shares of PayPal Holdings (NASDAQ:PYPL) have risen a significant 21% over the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In particular, we’ll be paying attention to PayPal Holdings’ ROE today.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for PayPal Holdings

How to calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for PayPal Holdings is:

10% = US$2.1 billion ÷ US$20 billion (based on trailing 12 months to June 2022).

“Yield” is the income the business has earned over the past year. This therefore means that for every $1 of investment by its shareholder, the company generates a profit of $0.10.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

PayPal Holdings earnings growth and 10% ROE

At first glance, PayPal Holdings appears to have a decent ROE. Even so, compared to the industry average ROE of 18%, we are not very enthusiastic. However, the moderate 20% growth in net income seen by PayPal Holdings over the past five years is definitely positive. We believe there could be other factors at play here. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio. Keep in mind that the company has a respectable level of ROE. It’s just that the industry’s ROE is higher. So that also gives some color to the fairly high earnings growth the company has seen.

In a next step, we compared PayPal Holdings’ net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 14%.

NasdaqGS: PYPL Past Earnings Growth October 1, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Has the market priced in PYPL’s future prospects? You can find out in our latest infographic research report on intrinsic value.

Does PayPal Holdings Use Retained Earnings Effectively?

PayPal Holdings currently pays no dividends, which essentially means it has reinvested all of its earnings back into the business. This certainly contributes to the decent number of earnings growth we discussed above.

Summary

Overall, we believe PayPal Holdings’ performance has been quite good. In particular, we appreciate the fact that the company reinvests heavily in its business at a moderate rate of return. Unsurprisingly, this led to impressive earnings growth. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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