Korn Ferry (NYSE:KFY) stock is up 12% in the past month. Since the market usually pays for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could influence the market. In particular, we will be paying attention to Korn Ferry’s ROE today.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for Korn Ferry
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Korn Ferry’s ROE is:
21% = $331 million ÷ $1.5 billion (based on trailing 12 months to April 2022).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every dollar of share capital it has, the company has made a profit of $0.21.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Korn Ferry profit growth and 21% ROE
For starters, Korn Ferry’s ROE looks acceptable. Compared to the industry average ROE of 17%, the company’s ROE looks quite remarkable. Probably because of this, Korn Ferry has been able to see an impressive net income growth of 20% over the past five years. We believe there could be other factors at play here as well. For example, the business has a low payout ratio or is efficiently managed.
As a next step, we compared Korn Ferry’s net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 16%.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you might want to check whether Korn Ferry is trading on a high P/E or on a low P/E, relative to its industry.
Does Korn Ferry use its profits efficiently?
Korn Ferry’s three-year median payout ratio is below 14%, meaning it retains a higher percentage (86%) of its earnings. So it looks like management is massively reinvesting earnings to grow their business, which is reflected in their earnings growth.
Additionally, Korn Ferry has paid dividends over an eight-year period, which means the company is pretty serious about sharing its profits with shareholders. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 8.9% over the next three years. However, the company’s ROE is not expected to change much despite the lower expected payout ratio.
Overall, we are quite satisfied with Korn Ferry’s performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, in studying current analyst estimates, we were concerned that while the company has increased earnings in the past, analysts expect earnings to decline in the future. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.