Yahoo Finance Will Weakness in Watts Water Technologies, Inc.'s (NYSE:WTS) Stock Prove Temporary Given Strong Fundamentals?
With its stock down 8.3% over the past three months, it is easy to disregard Watts Water Technologies (NYSE:WTS). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Watts Water Technologies' ROE today.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Watts Water Technologies
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Watts Water Technologies is:
19% = US$262m ÷ US$1.3b (Based on the trailing twelve months to March 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.19.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Watts Water Technologies' Earnings Growth And 19% ROE
To start with, Watts Water Technologies' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 14%. This certainly adds some context to Watts Water Technologies' decent 19% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Watts Water Technologies' growth is quite high when compared to the industry average growth of 8.1% in the same period, which is great to see.
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. If you're wondering about Watts Water Technologies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Watts Water Technologies Using Its Retained Earnings Effectively?
Watts Water Technologies' three-year median payout ratio to shareholders is 21% (implying that it retains 79% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Besides, Watts Water Technologies has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 17% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.
Summary
In total, we are pretty happy with Watts Water Technologies' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 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.
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