Is Howmet Aerospace Inc.'s (NYSE:HWM) Recent Stock Performance Tethered To Its Strong Fundamentals?

Howmet Aerospace (NYSE:HWM) has had a great run on the share market with its stock up by a significant 48% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Howmet Aerospace's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Howmet Aerospace is:

26% = US$1.3b ÷ US$4.8b (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.26 in profit.

See our latest analysis for Howmet Aerospace

Why Is ROE Important For 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.

Howmet Aerospace's Earnings Growth And 26% ROE

First thing first, we like that Howmet Aerospace has an impressive ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. Under the circumstances, Howmet Aerospace's considerable five year net income growth of 39% was to be expected.

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 14% in the same period, which is great to see.

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. Is Howmet Aerospace fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Howmet Aerospace Making Efficient Use Of Its Profits?

Howmet Aerospace's ' three-year median payout ratio is on the lower side at 8.9% 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.

Additionally, Howmet Aerospace has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with 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 11%. As a result, Howmet Aerospace's ROE is not expected to change by much either, which we inferred from the analyst estimate of 30% for future ROE.

Summary

On the whole, we feel that Howmet Aerospace's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.