Stock Analysis

American States Water Company's (NYSE:AWR) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

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NYSE:AWR
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American States Water's (NYSE:AWR) stock up by 4.8% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study American States Water's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for American States Water

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 American States Water is:

13% = US$83m ÷ US$634m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

American States Water's Earnings Growth And 13% ROE

To begin with, American States Water seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.7%. Probably as a result of this, American States Water was able to see a decent growth of 7.6% over the last five years.

We then performed a comparison between American States Water's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 7.3% in the same period.

past-earnings-growth
NYSE:AWR Past Earnings Growth February 17th 2021

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. If you're wondering about American States Water's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is American States Water Efficiently Re-investing Its Profits?

While American States Water has a three-year median payout ratio of 53% (which means it retains 47% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, American States Water 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 58% of its profits over the next three years. Accordingly, forecasts suggest that American States Water's future ROE will be 14% which is again, similar to the current ROE.

Summary

On the whole, we feel that American States Water's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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What are the risks and opportunities for American States Water?

American States Water Company, through its subsidiaries, provides water and electric services to residential, commercial, industrial, and other customers in the United States.

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Rewards

  • Earnings are forecast to grow 8.77% per year

Risks

  • Debt is not well covered by operating cash flow

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