Does the recent performance of Quest Diagnostics Incorporated (NYSE: DGX) stock reflect its financial health?
Shares of Quest Diagnostics (NYSE: DGX) rose 4.0% over the past month. Since the market typically pays for the long-term financial health of a business, we decided to study the fundamentals of the business to see if they could influence the market. Specifically, we have decided to study the ROE of Quest Diagnostics in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Check out our latest review for Quest Diagnostics
How do you calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Quest Diagnostics’ ROE is:
27% = US $ 1.9 billion ÷ US $ 6.9 billion (based on the last twelve months to March 2021).
“Return” refers to a company’s profits over the past year. Another way to look at it is that for every dollar in equity, the company was able to make $ 0.27 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Quest Diagnostics profit growth and 27% ROE
First, we recognize that Quest Diagnostics has a significantly high ROE. Second, even compared to the industry average of 16%, the company’s ROE is quite impressive. It is probably because of this that Quest Diagnostics has been able to record decent net income growth of 13% over the past five years.
Then, comparing Quest Diagnostics’ net income growth with the industry, we found that the reported growth of the business is similar to the industry average growth rate of 13% over the same period.
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. What is DGX worth today? The intrinsic value infographic in our free research report helps to visualize whether DGX is currently poorly valued by the market.
Is Quest Diagnostics Using Its Profits Effectively?
Quest Diagnostics has a healthy combination of a moderate three-year median payout ratio of 34% (or retention rate of 66%) and respectable earnings growth as we saw above, which means that the company made efficient use of its profits.
Additionally, Quest Diagnostics has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 29% of its profits over the next three years. Either way, Quest Diagnostics’ ROE is expected to drop to 14% despite no expected change in its payout ratio.
Overall, we think Quest Diagnostics has performed quite well. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, studying the latest analysts’ forecast, we found that while the company has seen past earnings growth, analysts expect future earnings to decline. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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