Automatic Data Processing, Inc. (NASDAQ:ADP) Stocks Wet Down But Fundamentals Look Decent: Will the Market Correct the Stock Price Going Forward?
Automatic Data Processing (NASDAQ:ADP) had a tough three months with its share price down 7.9%. However, stock prices are usually determined by a company’s long-term finances, which in this case seem quite respectable. Specifically, we decided to study the ROE of automatic data processing in this article.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for automatic data processing
How is ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for automatic data processing is:
68% = US$2.9 billion ÷ US$4.2 billion (based on trailing 12 months to March 2022).
The “yield” is the amount earned after tax over the last twelve months. So, this means that for every $1 of investment by its shareholder, the company generates a profit of $0.68.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A Side-by-Side Comparison of Automated Data Processing Earnings and 68% ROE Growth
First, we love that Automatic Data Processing has an impressive ROE. Second, a comparison to the average industry-reported ROE of 16% also does not go unnoticed for us. This likely paved the way for the modest 9.8% net income growth seen by automatic data processing over the past five years. growth
We then compared the growth of automatic data processing net income with the industry and found that the company’s growth figure is lower than the average industry growth rate of 15% over the same period. , which is a little disturbing.
Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Is ADP correctly valued? This intrinsic business value infographic has everything you need to know.
Is IT effectively reinvesting its profits?
Automatic Data Processing has a significant three-year median payout ratio of 59%, meaning it only has 41% left to reinvest in its business. This implies that the company was able to achieve decent earnings growth despite returning most of its earnings to shareholders.
Moreover, automatic data processing has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out approximately 56% of its earnings over the next three years. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 64%.
Overall, we believe that automatic data processing has positive attributes. Its earnings growth is decent and the high ROE contributes to this growth. However, investors could have benefited even more from the high ROE if the company had reinvested more of its profits. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.