Avient (NYSE:AVNT) has had a great run on the share market with its stock up by a significant 11% over the last three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Avient's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Do You Calculate Return On Equity?

ROE 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 Avient is:

3.3% = US$76m ÷ US$2.3b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Avient's Earnings Growth And 3.3% ROE

As you can see, Avient's ROE looks pretty weak. Even when compared to the industry average of 13%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by Avient over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Avient's net income growth with the industry and discovered that the industry saw an average growth of 14% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Avient fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Avient Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 60% (implying that the company keeps only 40% of its income) of its business to reinvest into its business), most of Avient's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Avient has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 33% over the next three years. As a result, the expected drop in Avient's payout ratio explains the anticipated rise in the company's future ROE to 9.9%, over the same period.

Summary

Overall, we would be extremely cautious before making any decision on Avient. 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. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.