With its stock down 5.3% over the past month, it is easy to disregard Woodward (NASDAQ:WWD). We, however decided to study the company’s financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company’s financials. Particularly, we will be paying attention to Woodward’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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Woodward
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Woodward is:
8.8% = US$171m ÷ US$1.9b (Based on the trailing twelve months to December 2022).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.09 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
Woodward’s Earnings Growth And 8.8% ROE
On the face of it, Woodward’s ROE is not much to talk about. However, its ROE is similar to the industry average of 8.8%, so we won’t completely dismiss the company. However, Woodward has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company’s ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.
As a next step, we compared Woodward’s net income growth with the industry and discovered that the industry saw an average growth of 5.5% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for WWD? You can find out in our latest intrinsic value infographic research report.
Is Woodward Making Efficient Use Of Its Profits?
Woodward’s low three-year median payout ratio of 17% (implying that the company keeps83% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that’s not the case.
Moreover, Woodward has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 19%.
On the whole, we feel that the performance shown by Woodward can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. 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.
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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.
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