Profit ratio

Falling Stocks and Strong Fundamentals: Is the Market Wrong on Curtiss-Wright Corporation (NYSE: CW)?

Curtiss-Wright (NYSE:CW) had a tough three months with its share price down 8.3%. However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. Specifically, we decided to study the Curtiss-Wright ROE in this article.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest analysis for Curtiss-Wright

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Curtiss-Wright is:

13% = $248 million ÷ $1.8 billion (based on trailing 12 months to March 2022).

The “yield” is the profit of the last twelve months. This means that for every dollar of shareholders’ equity, the company generated $0.13 in profit.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Curtiss-Wright earnings growth and ROE of 13%

For starters, the Curtiss-Wright ROE looks acceptable. Additionally, the company’s ROE compares quite favorably to the industry average of 10%. Despite this, Curtiss-Wright’s five-year net income growth has been quite weak, averaging just 2.4%. This is usually not the case because when a company has a high rate of return, it should generally also have a high rate of earnings growth. A few likely reasons why this could happen are that the company might have a high payout ratio or the company has misallocated capital, for example.

As a next step, we compared Curtiss-Wright’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 2.9%. during the same period.

NYSE: CW Past Earnings Growth June 5, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Curtiss-Wright’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.

Does Curtiss-Wright use its profits effectively?

Curtiss-Wright’s low three-year median payout ratio of 11% (or a retention rate of 89%) should mean the company retains most of its earnings to fuel growth. However, the low earnings growth figure does not reflect this, as high growth usually follows high earnings retention. So there could be another explanation for this. For example, the company’s business may deteriorate.

Moreover, Curtiss-Wright has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends to earnings growth. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 8.0% over the next three years. Thus, the expected decline in the payout rate explains the expected increase in the company’s ROE to 16%, over the same period.

Summary

Overall, we think Curtiss-Wright’s performance was pretty good. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. As a result, its decent revenue growth is not surprising. That said, looking at current analyst estimates, we have seen that the company’s earnings are expected to accelerate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.