[ad_1]
Some investors are already familiar with financial metrics (hat tip), but this article is for those who want to learn more about return on equity (ROE) and why it matters. By learning by doing, you can look at ROE and better understand Howmet Aerospace Inc. (NYSE:HWM).
ROE or Return on Equity is a useful tool for evaluating how effectively a company is able to generate returns on the investment it receives from its shareholders. In other words, ROE shows the return each dollar makes on a shareholder’s investment.
See the latest analysis from Howmet Aerospace
ROE calculation method
ROE can be calculated using the following formula:
Return on Equity = Net Income (from Continuing Operations) ÷ Shareholders’ Equity
So, based on the above formula, Howmet Aerospace’s ROE is:
13% = US$435 million ÷ US$3.3 billion (based on the last 12 months to September 2022).
“Return” refers to the company’s earnings for the last year. So, this means that for every $1 a shareholder invests, the company generates his $0.13 profit.
Is Howmet Aerospace’s ROE good?
One easy way to determine if a company has a high return on equity is to compare it to the industry average. Importantly, this is far from a perfect scale. This is because companies vary widely within the same industry classification. Fortunately, Howmet Aerospace’s ROE is better than the aerospace and defense industry average (10%).
That’s a good sign. That said, high ROE doesn’t necessarily mean high profitability. Aside from changes in net income, high ROE can also be the result of high debt relative to equity, which indicates risk. To see the two risks we’ve identified for Howmet Aerospace, visit our risk dashboard for free.
How does debt affect ROE?
Virtually all businesses need capital to invest in their businesses and grow their profits. That cash can come from the issuance of shares, retained earnings, or debt. In his first two cases, ROE captures the use of this capital for growth. In the latter case, debt used for growth improves earnings but does not affect total capital. Thus, using debt boosts her ROE even though the core economics of the business remain the same.
Howmet Aerospace Debt and 13% ROE
Howmet Aerospace’s heavy use of debt is noteworthy, leading to a debt-to-equity ratio of 1.27. His ROE is pretty good, but the amount of debt the company currently has is not ideal. Debt certainly brings extra risk and is only truly worth it if the company generates some return from it.
overview
Return on equity is one way in which the quality of business of different companies can be compared. A company that can achieve a high return on equity without debt can be considered a quality business. If two companies have the same ROE, he usually prefers the one with less debt.
But ROE is just one piece of a larger puzzle. Because high-quality businesses often trade at high multiples of earnings. Earnings growth relative to expectations reflected in the stock price is a particularly important consideration. So it’s good to take a peek at the data-rich interactive charts about the company’s forecasts.
However, please note the following: Howmet Aerospace may not be the best stock to buy. Now take a look at this freedom An interesting list of companies with high ROE and low debt.
Do you have feedback on this article? What interests you? contact directly with us. Or send an email to our editorial team (at) Simplywallst.com.
This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …
Participate in Paid User Research Sessions
you $30 USD Amazon Gift Card An hour of your time while helping build better investment tools for individual investors like you.SIGN UP HERE
[ad_2]
Source link
