Cintas (NASDAQ:CTAS) stock is up 8.0% over the past three months. Given its impressive performance, we decided to study the company’s key financial indicators, as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on the ROE of Cintas.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Cintas
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Cintas is:
37% = US$1.2 billion ÷ US$3.3 billion (based on trailing 12 months to February 2022).
The “return” is the annual profit. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.37.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s 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.
A side-by-side comparison of Cintas’ earnings growth and 37% ROE
First, we appreciate that Cintas has an impressive ROE. Second, even compared to the industry average of 9.9%, the company’s ROE is quite impressive. Probably because of this, Cintas has been able to see a decent net income growth of 16% over the past five years.
As a next step, we compared Cintas’ net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 7.4%.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Has the market integrated the future prospects of the CTAS? You can find out in our latest infographic research report on intrinsic value.
Does Cintas effectively reinvest its profits?
With a three-year median payout ratio of 30% (implying the company retains 70% of its earnings), it appears Cintas is effectively reinvesting to see respectable earnings growth and paying a well-covered dividend. .
Also, Cintas has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 33%. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 37%.
Overall, we’re pretty happy with Cintas’ performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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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.