Intuit (NASDAQ:INTU) stock has risen by 4.5% over the past week. Given this impressive performance, we decided to examine the company’s key financial indicators, as long-term fundamentals of a company usually determine market results. In this article, we focused on Intuit’s return on equity.

Return on equity (ROE) is an important metric used to assess how efficiently a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the return on the capital provided by the company’s shareholders.

Check out our latest analysis for Intuit

How do you calculate return on equity?

The Formula for return on equity Is:

Return on equity = Net profit (from continuing operations) ÷ Equity

Based on the above formula, the ROE for Intuit is:

16% = $3.1 billion ÷ $19 billion (based on the trailing twelve months ending April 2024).

The “return” refers to the profits of a company in the last year. You can also think of it like this: for every dollar of equity, the company was able to generate $0.16 in profit.

What does return on equity (ROE) have to do with earnings growth?

So far, we’ve learned that return on equity measures how efficiently a company generates its profits. Based on how much of its profits the company reinvests or “retains,” we can then judge a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the return on equity and retention of earnings, the higher a company’s growth rate will be compared to companies that don’t necessarily have these characteristics.

A comparison of Intuit’s earnings growth and 16% ROE

First of all, Intuit’s return on equity looks acceptable. And when we compared it to the industry, we found that the industry average return on equity is similar at 14%. This likely laid the foundation for the decent 12% growth that Intuit has seen over the past five years.

Next, we compared Intuit’s net income growth with that of the industry and were disappointed to find that the company’s growth was below the average industry growth of 19% over the same period.

The basis for valuing a company depends largely on its earnings growth. The investor should try to determine if the expected earnings growth or decline, whichever may be the case, is built into the price. This will help him determine if the future of the stock looks promising or threatening. What is INTU worth today? The intrinsic value infographic in our free research report helps visualize whether INTU is currently mispriced by the market.

Does Intuit use its retained earnings effectively?

Intuit has a healthy combination of a modest three-year average payout ratio of 34% (or a retention rate of 66%) and notable earnings growth, as we saw above, meaning the company is using its earnings efficiently.

In addition, Intuit has paid dividends for at least a decade, which means that the company is very serious about sharing its profits with shareholders. After examining the latest analyst consensus data, we found that the company’s future payout ratio is expected to decline to 21% over the next three years. The fact that the company’s return on equity is expected to rise to 26% over the same period is explained by the decline in the payout ratio.

Summary

Overall, we think Intuit’s performance is pretty good. In particular, we like that the company reinvests a large portion of its profits at a high rate of return. This has naturally led to the company posting good earnings growth. However, recent industry analyst forecasts show that the company’s earnings are expected to grow. You can find more information on the company’s future earnings growth forecasts here. free Read the company’s analyst forecasts report to learn more.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.