Howmet Aerospace Inc.'s (NYSE:HWM) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

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Most readers would already be aware that Howmet Aerospace’s (NYSE:HWM) stock increased significantly by 29% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Howmet Aerospace’s ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

See our latest analysis for Howmet Aerospace

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Howmet Aerospace is:

21% = US$860m ÷ US$4.1b (Based on the trailing twelve months to March 2024).

The ‘return’ is the yearly profit. That means that for every $1 worth of shareholders’ equity, the company generated $0.21 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

Howmet Aerospace’s Earnings Growth And 21% ROE

To start with, Howmet Aerospace’s ROE looks acceptable. Especially when compared to the industry average of 14% the company’s ROE looks pretty impressive. Probably as a result of this, Howmet Aerospace was able to see an impressive net income growth of 24% over the last five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Howmet Aerospace’s growth is quite high when compared to the industry average growth of 6.6% in the same period, which is great to see.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Is HWM fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Howmet Aerospace Making Efficient Use Of Its Profits?

Howmet Aerospace has a really low three-year median payout ratio of 8.6%, meaning that it has the remaining 91% left over to reinvest into its business. So it looks like Howmet Aerospace is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Howmet Aerospace has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 8.1%. Still, forecasts suggest that Howmet Aerospace’s future ROE will rise to 26% even though the the company’s payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that Howmet Aerospace’s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.