Is Weakness In W.W. Grainger, Inc. (NYSE:GWW) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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

Thu, Apr 17, 2025, 5:00 AM 3 min read

It is hard to get excited after looking at W.W. Grainger's (NYSE:GWW) recent performance, when its stock has declined 11% over the past three months. 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. Specifically, we decided to study W.W. Grainger's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How To 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 W.W. Grainger is:

54% = US$2.0b ÷ US$3.7b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.54.

See our latest analysis for W.W. Grainger

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

W.W. Grainger's Earnings Growth And 54% ROE

To begin with, W.W. Grainger has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 15% also doesn't go unnoticed by us. As a result, W.W. Grainger's exceptional 23% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing W.W. Grainger's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% over the last few years.

past-earnings-growth — NYSE:GWW Past Earnings Growth April 17th 2025

Earnings growth is a huge factor in stock valuation. 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. Is W.W. Grainger fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is W.W. Grainger Using Its Retained Earnings Effectively?

W.W. Grainger's ' three-year median payout ratio is on the lower side at 21% implying that it is retaining a higher percentage (79%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, W.W. Grainger has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 21%. Still, forecasts suggest that W.W. Grainger's future ROE will drop to 41% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that W.W. Grainger's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.