Kenvue (NYSE:KVUE) has had a great run in the stock market, with its stock up a respectable 15% in the last month. Since the market usually pays for the long-term fundamentals of a company, we decided to examine the company’s key performance indicators to see if they could influence the market. In particular, we will be paying attention to Kenvue’s ROE today.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how effectively their capital is being reinvested. 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 Kenvue

How is ROE calculated?

Return on equity can be calculated using the following formula:

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

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

11% = $1.1 billion ÷ $10 billion (based on the trailing twelve months ending June 2024).

The “return” is the annual profit. This means that the company generated $0.11 in profit for every dollar of equity.

What is the relationship between ROE and earnings growth?

We have already established that return on equity (ROE) serves as an efficient measure of a company’s future earnings. Based on the proportion of profits the company reinvests or “retains,” we can then assess a company’s future ability to generate profits. Generally speaking, companies with high return on equity and earnings retention will have a higher growth rate than companies that do not have these characteristics, all other things being equal.

A comparison of Kenvue’s earnings growth and 11% ROE

At first glance, Kenvue appears to have a decent return on equity. And when comparing it to the industry, we found that the industry average return on equity is similarly high at 12%. This, among other factors, likely explains Kenvue’s modest growth of 13% over the past five years.

Next, we compared Kenvue’s net income growth with the industry and found that the company’s reported growth is in line with the industry average growth rate of 13% over the past few years.

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 company’s expected earnings growth (or earnings decline). This then helps them determine whether the stock is positioned for a good or bad future. What is KVUE worth today? The intrinsic value infographic in our free research report helps visualize whether KVUE is currently mispriced by the market.

Does Kenvue reinvest its profits efficiently?

Kenvue’s high three-year median payout ratio of 60% (or a retention rate of 40%) suggests that the company’s growth has not really been slowed down, even though it has distributed most of its earnings to shareholders.

In addition to earnings growth, Kenvue only recently started paying dividends. It is quite possible that the company wanted to impress its shareholders. After examining the latest analyst consensus data, we found that the company is expected to continue paying out about 67% of its earnings over the next three years. However, projections suggest that Kenvue’s future return on equity will increase to 22%, although the company’s payout ratio is not expected to change significantly.

Diploma

Overall, we think Kenvue’s performance is pretty good. Its high return on equity is particularly notable, and is probably the explanation for its significant earnings growth. Still, the company retains a small portion of its earnings. This means that the company was able to grow its earnings despite everything, so that’s not too bad. However, when looking at the latest analyst estimates, we found that the company’s earnings are expected to gain momentum. Are these analyst expectations based on broader industry expectations or on the company’s fundamentals? Click here to go to our analyst forecasts page for the company.

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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.