Is The Cooper Companies, Inc.'s (NYSE:COO) Recent Performance Tethered To Its Attractive Financial Prospects?

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

Most readers would already know that Cooper Companies' (NYSE:COO) stock increased by 5.0% over the past month. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Cooper Companies' ROE today.

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.

Check out our latest analysis for Cooper Companies

How Is ROE Calculated?

Return on equity 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 Cooper Companies is:

38% = US$2.4b ÷ US$6.2b (Based on the trailing twelve months to April 2021).

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 $0.38 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. 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.

Cooper Companies' Earnings Growth And 38% ROE

Firstly, we acknowledge that Cooper Companies has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. As a result, Cooper Companies' exceptional 44% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that Cooper Companies' growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.

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

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Cooper Companies fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Cooper Companies Making Efficient Use Of Its Profits?

Cooper Companies' ' three-year median payout ratio is on the lower side at 0.8% implying that it is retaining a higher percentage (99%) of its profits. So it looks like Cooper Companies is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Cooper Companies is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 0.3% over the next three years. Still forecasts suggest that Cooper Companies' future ROE will drop to 11% even though the the company's payout ratio is expected to decrease. This suggests that there could be other factors could driving the anticipated decline in the company's ROE.

Conclusion

Overall, we are quite pleased with Cooper Companies' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.