LKQ (NASDAQ: LKQ) stock has risen 17% in the past three months. 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 this article, we have decided to focus on LKQ’s ROE.
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 review for LKQ
How to calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for LKQ is:
13% = US $ 760 million ÷ US $ 5.9 billion (based on the last twelve months to March 2021).
The “return” is the amount earned after tax over the past twelve months. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.13.
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 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. .
LKQ profit growth and 13% ROE
At first glance, LKQ appears to have a decent ROE. Additionally, the company’s ROE is similar to the industry average of 14%. This probably partly explains LKQ’s moderate 6.7% growth over the past five years, among other factors.
As a next step, we compared LKQ’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 6.6% over the past year. same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. Has the market assessed LKQ’s future prospects? You can find out in our latest Intrinsic Value infographic research report.
Is LKQ Efficiently Using Its Retained Earnings?
All in all, we are quite satisfied with the performance of LKQ. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. Unsurprisingly, this has 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 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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