Is Strong Financial Data Driving the Market?
The automatic data processing stock (NASDAQ: ADP) rose 4.6% over the past month. Given that the market rewards strong, long-term financials, we wonder if this is the case in this case. In this article, we have decided to focus on the ROE of Automatic Data Processing.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest analysis for automatic data processing
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 automatic data processing is:
44% = US $ 2.5 billion US $ 5.7 billion (based on the last twelve months to March 2021).
The “return” is the income the business has earned over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.44.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
A Side-by-Side Comparison of Automated Data Processing Profit Growth and ROE of 44%
First of all, we love that automatic data processing has an impressive ROE. Second, even compared to the industry average of 18%, the company’s ROE is quite impressive. This likely paved the way for the modest 11% net income growth seen by automatic data processing over the past five years. growth
As a next step, we compared the Automatic Data Processing net revenue growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 13% over the course of from the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. 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 worrisome. Is automatic data processing valued enough compared to other companies? These 3 evaluation measures could help you decide.
Is Automatic Data Processing Efficiently Reinvesting Its Profits?
Automated Data Processing has a significant three-year median payout rate of 59%, which means it only has 41% left to reinvest in its business. This implies that the company has been able to achieve decent profit growth despite returning most of its profits to shareholders.
In addition, the automatic data processing has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 55%. As a result, Automatic Data Processing’s ROE is not expected to change much either, which we have deduced from analysts’ estimate of 46% for future ROE.
Overall, we are quite happy with the performance of Automatic Data Processing. Especially the high ROE, which contributed to the impressive growth in earnings. Although the company only reinvested a small portion of its profits, it still managed to increase its profits, which is appreciable. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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