Lincoln Electric Holdings, Inc.'s (NASDAQ:LECO) Stock Been Rising: Are Strong Financials Guiding The Market?
Most readers would already know that Lincoln Electric Holdings' (NASDAQ:LECO) stock increased by 4.3% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Lincoln Electric Holdings' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Lincoln Electric Holdings
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Lincoln Electric Holdings is:
28% = US$225m ÷ US$803m (Based on the trailing twelve months to March 2021).
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 $0.28 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.
Lincoln Electric Holdings' Earnings Growth And 28% ROE
First thing first, we like that Lincoln Electric Holdings has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. Probably as a result of this, Lincoln Electric Holdings was able to see a decent net income growth of 8.4% over the last five years.
As a next step, we compared Lincoln Electric Holdings' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 7.8% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for LECO? You can find out in our latest intrinsic value infographic research report.
Is Lincoln Electric Holdings Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 40% (implying that the company retains 60% of its profits), it seems that Lincoln Electric Holdings is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Moreover, Lincoln Electric Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 31% over the next three years. As a result, the expected drop in Lincoln Electric Holdings' payout ratio explains the anticipated rise in the company's future ROE to 42%, over the same period.
Conclusion
Overall, we are quite pleased with Lincoln Electric Holdings' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.
This article by Simply Wall St is general in nature. 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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