Could The Market Be Wrong About NRW Holdings Limited (ASX:NWH) Given Its Attractive Financial Prospects?

NRW Holdings (ASX:NWH) has had a rough week with its share price down 6.6%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to NRW Holdings' ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for NRW Holdings

How To Calculate Return On Equity?

Return on equity 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 NRW Holdings is:

14% = AU$86m ÷ AU$610m (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.14.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 NRW Holdings' Earnings Growth And 14% ROE

To begin with, NRW Holdings seems to have a respectable ROE. Even when compared to the industry average of 12% the company's ROE looks quite decent. This probably goes some way in explaining NRW Holdings' moderate 17% growth over the past five years amongst other factors.

Next, on comparing NRW Holdings' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about NRW Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is NRW Holdings Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 67% (or a retention ratio of 33%) for NRW Holdings suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, NRW Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 61%. Still, forecasts suggest that NRW Holdings' future ROE will rise to 18% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with NRW Holdings' performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.