It’s hard to get excited after looking at the recent performance of Zurn Water Solutions (NYSE: ZWS), as its stock has fallen 42% in the past month. But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. Specifically, we have decided to study the ROE of Zurn Water Solutions in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Zurn Water Solutions
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Zurn Water Solutions is:
14% = US $ 232 million Ã· US $ 1.6 billion (based on the last twelve months to September 2021).
The “return” is the profit of the last twelve months. This means that for every dollar in shareholders’ equity, the company generated $ 0.14 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or âwithholdsâ and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A Side-by-Side Comparison of Zurn Water Solutions’ 14% Profit Growth and ROE
For starters, Zurn Water Solutions’ ROE seems acceptable. Regardless, the company’s ROE is still well below the industry average of 18%. However, the moderate 16% net income growth seen by Zurn Water Solutions over the past five years is certainly positive. So, there might be other aspects that positively influence earnings growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio. Keep in mind that the company has a respectable level of ROE. It’s just that the industry’s ROE is higher. So this also gives color to the fairly high profit growth seen by the company.
We then compared the net income growth of Zurn Water Solutions with the industry and we are delighted to see that the growth number of the company is higher than that of the industry which has a growth rate of 9, 4% over the same period.
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Zurn Water Solutions is trading high P / E or low P / E, relative to its industry.
Is Zurn Water Solutions Using Its Profits Effectively?
Zurn Water Solutions has a low three-year median payout rate of 18%, which means the company keeps the remaining 82% of its profits. This suggests that management is reinvesting most of the profits to grow the business.
While Zurn Water Solutions has seen its profits rise, it is only recently that it has started paying a dividend. It is very likely that the company has decided to impress new and existing shareholders with a dividend. Our latest analyst data shows the company’s future payout ratio is expected to reach 25% over the next three years. Still, forecasts suggest that Zurn Water Solutions’ future ROE will reach 29%, even if the company’s payout ratio is expected to increase. We assume that there could be other characteristics of the company that could be the source of the anticipated growth in the company’s ROE.
All in all, we are quite satisfied with the performance of Zurn Water Solutions. Specifically, we like the fact that he reinvested a large portion of his earnings at a moderate rate of return, resulting in earnings expansion. That said, looking at the latest analysts’ forecast, we found that while the company has seen past earnings growth, analysts expect future earnings to decline. To learn more about the company’s future earnings growth forecast, take a look at 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 using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.