Declining Stock and Solid Fundamentals: Is The Market Wrong About The Cooper Companies, Inc. (NYSE:COO)?

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Cooper Companies (NYSE:COO) has had a rough month with its share price down 6.2%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Cooper Companies’ ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

View our latest analysis for Cooper Companies

How Do You 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 Cooper Companies is:

14% = US$939m ÷ US$6.9b (Based on the trailing twelve months to January 2022).

The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.14 in profit.

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.

A Side By Side comparison of Cooper Companies’ Earnings Growth And 14% ROE

At first glance, Cooper Companies seems to have a decent ROE. On comparing with the average industry ROE of 10% the company’s ROE looks pretty remarkable. This certainly adds some context to Cooper Companies’ exceptional 53% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. Such as – high earnings retention or an efficient management in place.

As a next step, we compared Cooper Companies’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Cooper Companies fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Cooper Companies Efficiently Re-investing Its Profits?

Cooper Companies’ three-year median payout ratio to shareholders is 0.7%, which is quite low. This implies that the company is retaining 99% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Cooper Companies has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 0.3% over the next three years. However, the company’s ROE is not expected to change by much despite the lower expected payout ratio.

Conclusion

Overall, we are quite pleased with Cooper Companies’ performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.