Is The Procter & Gamble Company's (NYSE:PG) Latest Stock Performance Being Led By Its Strong Fundamentals?

Most readers would already know that Procter & Gamble's (NYSE:PG) stock increased by 3.1% 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 Procter & Gamble's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Procter & Gamble

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Procter & Gamble is:

30% = US$16b ÷ US$51b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.30 in profit.

What Has ROE Got To Do With 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. 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 Procter & Gamble's Earnings Growth And 30% ROE

To begin with, Procter & Gamble has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 18% also doesn't go unnoticed by us. This likely paved the way for the modest 8.9% net income growth seen by Procter & Gamble over the past five years.

Next, on comparing with the industry net income growth, we found that Procter & Gamble's growth is quite high when compared to the industry average growth of 2.4% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is PG worth today? The intrinsic value infographic in our free research report helps visualize whether PG is currently mispriced by the market.

Is Procter & Gamble Using Its Retained Earnings Effectively?

While Procter & Gamble has a three-year median payout ratio of 61% (which means it retains 39% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Procter & Gamble 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 over the next three years is expected to be approximately 55%. As a result, Procter & Gamble's ROE is not expected to change by much either, which we inferred from the analyst estimate of 35% for future ROE.

Summary

On the whole, we feel that Procter & Gamble's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.