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

Howmet Aerospace's (NYSE:HWM) stock is up by a considerable 26% 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. Particularly, we will be paying attention to Howmet Aerospace's 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.

View our latest analysis for Howmet Aerospace

How To 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 Howmet Aerospace is:

19% = US$765m ÷ US$4.0b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.19.

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 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.

Howmet Aerospace's Earnings Growth And 19% ROE

At first glance, Howmet Aerospace seems to have a decent ROE. On comparing with the average industry ROE of 13% the company's ROE looks pretty remarkable. Probably as a result of this, Howmet Aerospace was able to see a decent growth of 19% over the last five years.

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 4.7% in the same period, which is great to see.

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. 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 Efficiently Re-investing Its Profits?

Howmet Aerospace's three-year median payout ratio to shareholders is 8.3% (implying that it retains 92% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 8.9%. 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.

Summary

Overall, we are quite pleased with Howmet Aerospace's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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 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.