Is Quest Diagnostics Incorporated's (NYSE:DGX) Stock's Recent Performance A Reflection Of Its Financial Health?

By
Simply Wall St
Published
July 04, 2021
NYSE:DGX
Source: Shutterstock

Quest Diagnostics' (NYSE:DGX) stock up by 4.0% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Quest Diagnostics' ROE in this article.

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.

Check out our latest analysis for Quest Diagnostics

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Quest Diagnostics is:

27% = US$1.9b ÷ US$6.9b (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.27 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Quest Diagnostics' Earnings Growth And 27% ROE

Firstly, we acknowledge that Quest Diagnostics has a significantly high ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. Probably as a result of this, Quest Diagnostics was able to see a decent net income growth of 13% over the last five years.

Next, on comparing Quest Diagnostics' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% in the same period.

past-earnings-growth
NYSE:DGX Past Earnings Growth July 4th 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). Doing so will help them establish if the stock's future looks promising or ominous. What is DGX worth today? The intrinsic value infographic in our free research report helps visualize whether DGX is currently mispriced by the market.

Is Quest Diagnostics Making Efficient Use Of Its Profits?

Quest Diagnostics has a healthy combination of a moderate three-year median payout ratio of 34% (or a retention ratio of 66%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Quest Diagnostics has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 29% of its profits over the next three years. Regardless, Quest Diagnostics' ROE is speculated to decline to 14% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that Quest Diagnostics' performance has been quite good. 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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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