Are Revvity, Inc.'s (NYSE:RVTY) Mixed Financials Driving The Negative Sentiment?

Revvity, Inc. Common Stock -0.32%
 Revvity, Inc. Common Stock RVTY 118.75 -0.32%

With its stock down 5.5% over the past month, it is easy to disregard Revvity (NYSE:RVTY). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Revvity's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

## How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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

2.3% = US\$183m ÷ US\$7.8b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every \$1 worth of equity, the company was able to earn \$0.02 in profit.

## Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

## A Side By Side comparison of Revvity's Earnings Growth And 2.3% ROE

It is hard to argue that Revvity's ROE is much good in and of itself. Not just that, even compared to the industry average of 12%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by Revvity over the past five years could probably be the result of it having a lower ROE.

We then compared Revvity's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 17% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Revvity fairly valued compared to other companies? These 3 valuation measures might help you decide.

## Is Revvity Using Its Retained Earnings Effectively?

Revvity's low three-year median payout ratio of 5.9%, (meaning the company retains94% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

In addition, Revvity has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 4.5% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 7.9%, over the same period.

## Summary

On the whole, we feel that the performance shown by Revvity can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.