Is W.W. Grainger, Inc.'s (NYSE:GWW) Latest Stock Performance A Reflection Of Its Financial Health?

W.W. Grainger (NYSE:GWW) has had a great run on the share market with its stock up by a significant 26% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to W.W. Grainger's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for W.W. Grainger

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 W.W. Grainger is:

49% = US$1.9b ÷ US$3.9b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.49 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

W.W. Grainger's Earnings Growth And 49% ROE

First thing first, we like that W.W. Grainger has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. As a result, W.W. Grainger's exceptional 22% 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 23% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is W.W. Grainger fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is W.W. Grainger Making Efficient Use Of Its Profits?

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 looks like W.W. Grainger is reinvesting profits heavily to grow its business, which shows in its earnings growth.

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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 19% of its profits over the next three years. Accordingly, forecasts suggest that W.W. Grainger's future ROE will be 44% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with W.W. Grainger's performance. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.