Edgewell Personal Care Company's (NYSE:EPC) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 6.2% over the past week, it is easy to disregard Edgewell Personal Care (NYSE:EPC). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Edgewell Personal Care's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Edgewell Personal Care

How To Calculate Return On Equity?

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 Edgewell Personal Care is:

8.0% = US$124m ÷ US$1.6b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.08.

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.

A Side By Side comparison of Edgewell Personal Care's Earnings Growth And 8.0% ROE

On the face of it, Edgewell Personal Care's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 14% either. Despite this, surprisingly, Edgewell Personal Care saw an exceptional 53% net income growth over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Edgewell Personal Care's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is EPC worth today? The intrinsic value infographic in our free research report helps visualize whether EPC is currently mispriced by the market.

Is Edgewell Personal Care Making Efficient Use Of Its Profits?

The three-year median payout ratio for Edgewell Personal Care is 28%, which is moderately low. The company is retaining the remaining 72%. By the looks of it, the dividend is well covered and Edgewell Personal Care is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Edgewell Personal Care 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 18% over the next three years. As a result, the expected drop in Edgewell Personal Care's payout ratio explains the anticipated rise in the company's future ROE to 9.6%, over the same period.

Conclusion

On the whole, we do feel that Edgewell Personal Care has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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. 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.

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