Pool (NASDAQ: POOL) has had a strong run in the equity market with a significant 14% increase in its shares over the past month. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In particular, we will pay particular attention to Pool’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for the pool
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of the pool is:
61% = US $ 602 million ÷ US $ 985 million (based on the last twelve months to September 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.61.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
61% growth in pool profits and RCP
For starters, Pool has a pretty high ROE, which is interesting. Second, even compared to the industry average of 17%, the company’s ROE is quite impressive. Thus, the substantial 26% net income growth observed by Pool over the past five years is not too surprising.
As a next step, we compared Pool’s net income growth with the industry, and luckily, we found that the growth observed by the company is above the industry average growth of 9.5%.
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. What is POOL worth today? The intrinsic value infographic in our free research report helps to visualize whether POOL is currently poorly valued by the market.
Is the swimming pool using its profits efficiently?
The three-year median payout ratio for the Pool is 30%, which is moderately low. The company keeps the remaining 70%. This suggests that its dividend is well hedged, and given the high growth we talked about above, it looks like the Pool is reinvesting its earnings in an efficient manner.
In addition, Pool 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. Estimates from existing analysts suggest that the company’s future payout ratio is expected to drop to 23% over the next three years.
All in all, we are quite satisfied with the performance of Pool. 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. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. 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.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 any of the stocks mentioned.
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