It is hard to get excited after looking at Intuit’s (NASDAQ:INTU) recent performance, when its stock has declined 3.8% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Intuit’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Intuit
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Intuit is:
16% = US$2.9b ÷ US$18b (Based on the trailing twelve months to October 2024).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.16 in profit.
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
To start with, Intuit’s ROE looks acceptable. Especially when compared to the industry average of 12% the company’s ROE looks pretty impressive. This probably laid the ground for Intuit’s moderate 12% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Intuit’s reported growth was lower than the industry growth of 20% over the last few years, which is not something we like to see.
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. What is INTU worth today? The intrinsic value infographic in our free research report helps visualize whether INTU is currently mispriced by the market.
