Envista Holdings Corporation (NYSE:NVST) financials are too murky to relate to current stock price dynamics: What does the stock hold?
Most readers already know that shares of Envista Holdings (NYSE:NVST) are up a significant 10% in the past three months. However, we wonder if the company’s inconsistent financial statements would negatively impact the current share price dynamics. In particular, we’ll be paying attention to Envista Holdings’ ROE today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for Envista Holdings
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Envista Holdings is:
7.7% = $303 million ÷ $3.9 billion (based on trailing 12 months to October 2021).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.08.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Envista Holdings earnings growth and ROE of 7.7%
At first glance, Envista Holdings’ ROE isn’t much to tell. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 9.7%. Given the circumstances, the significant decline in net income of 17% seen by Envista Holdings over the past five years is not surprising. We believe there could be other factors at play here as well. For example, the company has a very high payout rate or faces competitive pressures.
That being said, we benchmarked Envista Holdings’ performance against the industry and were concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 14% over the of the same period.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Envista Holdings’ valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Does Envista Holdings Reinvest Earnings Effectively?
Envista Holdings pays no dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it can’t use them to grow its business. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
All in all, we are a bit ambivalent about Envista Holdings’ performance. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.