Do Fundamentals Have Any Role To Play In Driving Curtiss-Wright Corporation's (NYSE:CW) Stock Up Recently?
Curtiss-Wright's (NYSE:CW) stock is up by 3.0% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Curtiss-Wright's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Curtiss-Wright
How Do You Calculate Return On Equity?
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 Curtiss-Wright is:
15% = US$294m ÷ US$2.0b (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.15 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. 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.
A Side By Side comparison of Curtiss-Wright's Earnings Growth And 15% ROE
To begin with, Curtiss-Wright seems to have a respectable ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Curtiss-Wright in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
Next, on comparing with the industry net income growth, we found that Curtiss-Wright's reported growth was lower than the industry growth of 4.9% in the same period, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is CW worth today? The intrinsic value infographic in our free research report helps visualize whether CW is currently mispriced by the market.
Is Curtiss-Wright Making Efficient Use Of Its Profits?
Curtiss-Wright's low three-year median payout ratio of 11%, (meaning the company retains89% 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, Curtiss-Wright 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 7.6% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.
Overall, we feel that Curtiss-Wright certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.
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