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Most readers would already be aware that W.W. Grainger's (NYSE:GWW) stock increased significantly by 8.9% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study W.W. Grainger's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for W.W. Grainger is:
52% = US$2.0b ÷ US$3.8b (Based on the trailing twelve months to March 2025).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.52 in profit.
View our latest analysis for W.W. Grainger
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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of W.W. Grainger's Earnings Growth And 52% ROE
Firstly, we acknowledge that W.W. Grainger has a significantly high ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. As a result, W.W. Grainger's exceptional 23% net income growth seen over the past five years, doesn't come as a surprise.
We then performed a comparison between W.W. Grainger's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 21% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about W.W. Grainger's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.