Most readers would already be aware that Westinghouse Air Brake Technologies' (NYSE:WAB) stock increased significantly by 25% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Westinghouse Air Brake Technologies' ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Is ROE Calculated?

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 Westinghouse Air Brake Technologies is:

8.8% = US$929m ÷ US$11b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Westinghouse Air Brake Technologies' Earnings Growth And 8.8% ROE

At first glance, Westinghouse Air Brake Technologies' ROE doesn't look very promising. Next, when compared to the average industry ROE of 14%, the company's ROE leaves us feeling even less enthusiastic. However, we we're pleasantly surprised to see that Westinghouse Air Brake Technologies grew its net income at a significant rate of 23% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

We then compared Westinghouse Air Brake Technologies' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.4% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 WAB fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Westinghouse Air Brake Technologies Efficiently Re-investing Its Profits?

Westinghouse Air Brake Technologies has a really low three-year median payout ratio of 16%, meaning that it has the remaining 84% left over to reinvest into its business. So it looks like Westinghouse Air Brake Technologies is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Westinghouse Air Brake Technologies is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 11% over the next three years. As a result, the expected drop in Westinghouse Air Brake Technologies' payout ratio explains the anticipated rise in the company's future ROE to 13%, over the same period.

Conclusion

On the whole, we do feel that Westinghouse Air Brake Technologies has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.