Yahoo Finance Oil-Dri Corporation of America's (NYSE:ODC) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?
Oil-Dri Corporation of America (NYSE:ODC) has had a great run on the share market with its stock up by a significant 27% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Oil-Dri Corporation of America's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Oil-Dri Corporation of America
How To Calculate Return On Equity?
ROE 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 Oil-Dri Corporation of America is:
6.7% = US$10m ÷ US$154m (Based on the trailing twelve months to October 2022).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.07 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Oil-Dri Corporation of America's Earnings Growth And 6.7% ROE
At first glance, Oil-Dri Corporation of America's ROE doesn't look very promising. Next, when compared to the average industry ROE of 17%, the company's ROE leaves us feeling even less enthusiastic. Therefore, Oil-Dri Corporation of America's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Oil-Dri Corporation of America's net income growth with the industry and discovered that the industry saw an average growth of 5.4% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Oil-Dri Corporation of America's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Oil-Dri Corporation of America Making Efficient Use Of Its Profits?
Despite having a normal three-year median payout ratio of 48% (implying that the company keeps 52% of its income) over the last three years, Oil-Dri Corporation of America has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Moreover, Oil-Dri Corporation of America has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Summary
Overall, we have mixed feelings about Oil-Dri Corporation of America. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Oil-Dri Corporation of America's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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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.
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