Is Agilent Technologies, Inc.’s(NYSE:A) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Agilent Technologies’ (NYSE:A) stock increased significantly by 14% over the past three months. 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. Particularly, we will be paying attention to Agilent Technologies’ ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Agilent Technologies

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Agilent Technologies is:

14% = US$691m ÷ US$5.0b (Based on the trailing twelve months to July 2020).

The ‘return’ is the profit over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.14.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Agilent Technologies’ Earnings Growth And 14% ROE

To start with, Agilent Technologies’ ROE looks acceptable. Even when compared to the industry average of 14% the company’s ROE looks quite decent. This probably goes some way in explaining Agilent Technologies’ moderate 17% growth over the past five years amongst other factors.

We then compared Agilent Technologies’ net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 12% in the same period.

past-earnings-growth
NYSE:A Past Earnings Growth September 3rd 2020

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Agilent Technologies is trading on a high P/E or a low P/E, relative to its industry.

Is Agilent Technologies Efficiently Re-investing Its Profits?

Agilent Technologies has a three-year median payout ratio of 27%, which implies that it retains the remaining 73% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Agilent Technologies has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 22% of its profits over the next three years. Still, forecasts suggest that Agilent Technologies’ future ROE will rise to 23% even though the the company’s payout ratio is not expected to change by much.

Summary

Overall, we are quite pleased with Agilent Technologies’ performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. 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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