Is Rollins, Inc.'s (NYSE:ROL) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
July 25, 2021
NYSE:ROL
Source: Shutterstock

Rollins' (NYSE:ROL) stock is up by a considerable 12% over the past month. 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. In this article, we decided to focus on Rollins' ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Rollins

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 Rollins is:

31% = US$310m ÷ US$989m (Based on the trailing twelve months to March 2021).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.31 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Rollins' Earnings Growth And 31% ROE

Firstly, we acknowledge that Rollins has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 9.0% which is quite remarkable. This probably laid the groundwork for Rollins' moderate 11% net income growth seen over the past five years.

Next, on comparing Rollins' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.4% in the same period.

past-earnings-growth
NYSE:ROL Past Earnings Growth July 25th 2021

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Rollins''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Rollins Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 55% (or a retention ratio of 45%) for Rollins suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Rollins has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Rollins' performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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This article by Simply Wall St is general in nature. 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.
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