In This Article:
ABB (VTX:ABBN) has had a rough month with its share price down 4.2%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to ABB's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for ABB
How Do You Calculate Return On Equity?
ROE 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 ABB is:
27% = US$3.6b ÷ US$13b (Based on the trailing twelve months to June 2023).
The 'return' is the yearly profit. Another way to think of that is that for every CHF1 worth of equity, the company was able to earn CHF0.27 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
ABB's Earnings Growth And 27% ROE
To begin with, ABB has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 19% the company's ROE is quite impressive. So, the substantial 34% net income growth seen by ABB over the past five years isn't overly surprising.
We then performed a comparison between ABB's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 29% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is ABBN worth today? The intrinsic value infographic in our free research report helps visualize whether ABBN is currently mispriced by the market.
Is ABB Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 69% (implying that it keeps only 31% of profits) for ABB suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.