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

Most readers would already be aware that Howmet Aerospace's (NYSE:HWM) stock increased significantly by 32% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Howmet Aerospace

How Is ROE Calculated?

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:

22% = US$933m ÷ US$4.3b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.22.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Howmet Aerospace's Earnings Growth And 22% ROE

At first glance, Howmet Aerospace seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 14%. Probably as a result of this, Howmet Aerospace was able to see an impressive net income growth of 33% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Howmet Aerospace's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.2%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 HWM? You can find out in our latest intrinsic value infographic research report.

Is Howmet Aerospace Efficiently Re-investing Its Profits?

Howmet Aerospace's ' three-year median payout ratio is on the lower side at 8.6% implying that it is retaining a higher percentage (91%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Howmet Aerospace has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 9.7% of its profits over the next three years. Regardless, the future ROE for Howmet Aerospace is predicted to rise to 29% despite there being not much change expected in its payout ratio.

Conclusion

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 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.