Cintas Corporation (NASDAQ: CTAS) shares performed well: is the market in a solid financial position?

Most readers already know that Cintas (NASDAQ: CTAS) stock rose 2.3% in the past month. Given its impressive performance, we decided to study the key financial metrics of the business, as the long term fundamentals of a business usually dictate market results. In particular, we will pay particular attention to Cintas’ ROE today.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

See our latest review for Cintas

How do you calculate return on equity?

the ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Cintas is:

26% = 988 million USD ÷ 3.8 billion USD (based on the last twelve months up to February 2021).

The “return” is the annual profit. Another way to think about this is that for every $ 1 worth of equity, the company was able to make a profit of $ 0.26.

Why is ROE important for profit growth?

We have already established that ROE serves as an effective gauge to generate profit for the future profits of a business. We now need to assess how much profit the business is reinvesting or “withholding” for future growth, which then gives us an idea of ​​the growth potential of the business. 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 compared to companies that do not. the same characteristics.

A side-by-side comparison of Cintas’ 26% profit growth and ROE

For starters, Cintas has a pretty high ROE, which is interesting. Second, even compared to the industry average of 7.3%, the company’s ROE is quite impressive. It is probably because of this that Cintas has been able to see decent net income growth of 18% over the past five years.

As a next step, we compared Cintas’ net income growth to that of the industry and luckily we found that the growth observed by the company is above the industry average growth of 8.2%. .

NasdaqGS: CTAS Past Profit Growth May 21, 2021

Profit growth is an important metric to consider when valuing a stock. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is taken into account. This will help them determine if the future of the stock looks bright or worrisome. Does CTAS have a fair value? This Intrinsic Business Value infographic has everything you need to know.

Is Cintas using its retained earnings efficiently?

Cintas has a healthy combination of a moderate three-year median payout ratio of 26% (or retention rate of 74%) and respectable earnings growth as we saw above, which means that the company has used its profits efficiently.

In addition, Cintas has paid dividends over a period of at least ten years, which means the company is serious enough to share its profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 27%. As a result, forecasts suggest that Cintas’ future ROE will be 25%, which is again similar to the current ROE.

Conclusion

All in all, we are quite satisfied with the performance of Cintas. In particular, we like the fact that the company is reinvesting heavily in its activities and at a high rate of return. Unsurprisingly, this led to impressive profit growth. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim 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 information. Simply Wall St has no position in any of the stocks mentioned.
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About Geraldine Higgins

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