Could the market be wrong about PACCAR Inc (NASDAQ: PCAR) given its attractive financial outlook?
PACCAR (NASDAQ: PCAR) had a difficult month with its share price down 4.4%. But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. In particular, we will pay particular attention to the ROE of PACCAR today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Check out our latest review for PACCAR
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of PACCAR is:
15% = $ 1.7 billion $ 11 billion (based on the last twelve months to September 2021).
The “return” is the profit of the last twelve months. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.15 in profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the business is reinvesting or âwithholdingâ for future growth, which then gives us an idea of ââthe growth potential of the business. 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.
PACCAR profit growth and 15% ROE
For starters, PACCAR’s ROE seems acceptable. Especially compared to the industry average of 13%, the company’s ROE looks pretty impressive. This certainly adds context to PACCAR’s decent 7.6% net income growth seen over the past five years.
Then, comparing PACCAR’s net income growth with the industry, we found that the reported growth of the company is similar to the industry average growth rate of 8.5% over the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Is the PCAR correctly valued? This intrinsic business value infographic has everything you need to know.
Is PACCAR Efficiently Reinvesting Its Profits?
PACCAR’s three-year median payout ratio to shareholders is 21% (implying it keeps 79% of its revenue), which is lower, so it looks like management is heavily reinvesting profits to grow their business.
Furthermore, PACCAR 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. Our latest analyst data shows the company’s future payout ratio is expected to reach 33% over the next three years. Still, forecasts suggest that PACCAR’s future ROE will increase to 20% even if the company’s payout ratio is expected to increase. We assume that there could be other characteristics of the company that could be the source of the anticipated growth in the company’s ROE.
Overall, we think PACCAR’s performance has been quite good. Specifically, we like the fact that the company is reinvesting a huge portion of its profits at a high rate of return. This of course enabled the company to experience substantial growth in profits. That said, the latest forecasts from industry analysts show that the company’s profits are expected to pick up. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.