Becton, Dickinson and Company's (NYSE:BDX) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

editorial-team@simplywallst.com (Simply Wall St)

Mon, Jan 20, 2025, 7:00 AM 4 min read

Becton Dickinson's (NYSE:BDX) stock is up by 4.3% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Becton Dickinson's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Becton Dickinson

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Becton Dickinson is:

6.6% = US$1.7b ÷ US$26b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Becton Dickinson's Earnings Growth And 6.6% ROE

On the face of it, Becton Dickinson's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 12% either. Although, we can see that Becton Dickinson saw a modest net income growth of 11% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Becton Dickinson's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 12% in the same period.

past-earnings-growth — NYSE:BDX Past Earnings Growth January 20th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for BDX? You can find out in our latest intrinsic value infographic research report.

Is Becton Dickinson Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 68% (or a retention ratio of 32%) for Becton Dickinson suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Becton Dickinson is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 25% over the next three years. As a result, the expected drop in Becton Dickinson's payout ratio explains the anticipated rise in the company's future ROE to 20%, over the same period.

Summary

In total, it does look like Becton Dickinson has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.