Parker-Hannifin Corporation (NYSE:PH) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 5.6% over the past three months, it is easy to disregard Parker-Hannifin (NYSE:PH). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Parker-Hannifin’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for Parker-Hannifin

How Do You Calculate Return On Equity?

Return on equity 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 Parker-Hannifin is:

24% = US$3.2b ÷ US$13b (Based on the trailing twelve months to December 2024).

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 $0.24 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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 Parker-Hannifin’s Earnings Growth And 24% ROE

Firstly, we acknowledge that Parker-Hannifin has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 14% also doesn’t go unnoticed by us. This probably laid the groundwork for Parker-Hannifin’s moderate 18% net income growth seen over the past five years.

We then compared Parker-Hannifin’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 15% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for PH? You can find out in our latest intrinsic value infographic research report.

Is Parker-Hannifin Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 31% (implying that the company retains 69% of its profits), it seems that Parker-Hannifin is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.

Additionally, Parker-Hannifin has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 23% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Summary

In total, we are pretty happy with Parker-Hannifin’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.