It is hard to get excited after looking at Zurn Elkay Water Solutions' (NYSE:ZWS) recent performance, when its stock has declined 15% over the past three months. Given that stock prices are usually driven by a company's fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study Zurn Elkay Water Solutions' ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Zurn Elkay Water Solutions
How Do You 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 Zurn Elkay Water Solutions is:
3.1% = US$50m ÷ US$1.6b (Based on the trailing twelve months to September 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.03 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.
Zurn Elkay Water Solutions' Earnings Growth And 3.1% ROE
It is quite clear that Zurn Elkay Water Solutions' ROE is rather low. Even when compared to the industry average of 23%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 26% seen by Zurn Elkay Water Solutions was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
However, when we compared Zurn Elkay Water Solutions' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 13% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One 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 prospects. So, you may want to check if Zurn Elkay Water Solutions is trading on a high P/E or a low P/E, relative to its industry.
Is Zurn Elkay Water Solutions Making Efficient Use Of Its Profits?
Zurn Elkay Water Solutions has a high three-year median payout ratio of 61% (that is, it is retaining 39% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. Our risks dashboard should have the 2 risks we have identified for Zurn Elkay Water Solutions.
Moreover, Zurn Elkay Water Solutions has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 26% over the next three years.
Summary
Overall, we would be extremely cautious before making any decision on Zurn Elkay Water Solutions. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
Zurn Elkay Water Solutions(ニューヨーク証券取引所株式コード:ZWS)の最近の表現を見て、興奮しにくく、その株価は過去3カ月で15%下落した。株価は通常、ある会社のファンダメンタルズによって長期的に駆動されていることから、この場合、ファンダメンタルズはかなり疲弊しているように見えるため、当社の重要な財務指標を検討することにした。具体的には,本稿ではZurn Elkay Water SolutionsのROEを検討することにした
明らかに,Zurn Elkay Water Solutionsの純資産収益率(ROE)はかなり低い.23%の業界平均と比較しても、純資産収益率数字はかなり失望的だ。したがって、Zurn Elkay Water Solutionsの5年間の純収入が26%減少したと言うのは、純資産収益率が低いためかもしれないが、これは正しいかもしれない。しかし、収益の低下につながる他の要素もあるかもしれない。例えば、同社の配当率は非常に高い、あるいは競争圧力に直面している
しかし、Zurn Elkay Water Solutionsの増加を業界と比較すると、同社の収益は縮小しているにもかかわらず、同業界の収益は13%増加していることが分かった。これはかなり懸念される
会社に価値を与える基礎はその利益成長に大きくリンクしている。投資家にとって重要なのは、市場が会社の予想した収益増加(または低下)を消化したかどうかを知ることだ。そうすることは彼らがこの株の未来が明るいか不吉に見えるかを決定するのに役立つだろう。期待収益の増加を評価する良い指標は市場収益率であり、1株の利益見通しに基づいて市場がそのために支払う価格を決定する。したがって、Zurn Elkay Water Solutionsがその業界に対して高い収益率なのか、低い収益率なのかを見たいかもしれません
Zurn Elkay水務ソリューション会社はその利益を有効に利用していますか
Zurn Elkay Water Solutionsの3年間の中央値配当率は61%に達した(すなわち、39%の利益を維持している)。これはその会社が利益の大部分を配当金として株主に支払っているということを見せてくれる。これはなぜその収益が縮小しているのかをある程度説明する。この企業には資金の一部しか残っていない--これは長期的には会社に利益がないという悪循環だ。私たちのリスク制御パネルは私たちがZurn Elkay Water Solutionsのために決定した2つのリスクを含まなければならない
さらに、Zurn Elkay Water Solutionsは、収益が縮小しているにもかかわらず、株主が一致した配当金をより好むことを認識していることを示している3年間の配当金を支払っている。アナリストの既存の見通しによると、同社の今後3年間の配当率は26%に低下する見通しだ
要約.要約
全体的に、Zurn Elkay Water Solutionsに対して任意の決定を下す前に、私たちは非常に慎重になるだろう。わずかな利益を残しているため、同社の収益増加は無力であり、それが何を保持していても、再投資の収益率は非常に低い。こうなれば、最新の業界アナリストは、アナリストたちは同社の収益成長率が大幅に向上すると予測している。これらのアナリストの予想はこの業界に対する広範な期待に基づいているのか、それとも同社のファンダメンタルズに基づいているのか?ここをクリックして、当社のアナリストの予測ページに入ります