Advertisement
Canada markets closed

  • S&P/TSX

    21,708.44
    +52.39 (+0.24%)
     

  • S&P 500

    5,011.12
    -11.09 (-0.22%)
     

  • DOW

    37,775.38
    +22.07 (+0.06%)
     

  • CAD/USD

    0.7265
    +0.0001 (+0.01%)
     

  • CRUDE OIL

    82.66
    -0.07 (-0.08%)
     

  • Bitcoin CAD

    87,288.08
    +2,877.55 (+3.41%)
     

  • CMC Crypto 200

    1,311.43
    +425.90 (+48.09%)
     

  • GOLD FUTURES

    2,394.40
    -3.60 (-0.15%)
     

  • RUSSELL 2000

    1,942.96
    -4.99 (-0.26%)
     

  • 10-Yr Bond

    4.6470
    +0.0620 (+1.35%)
     

  • NASDAQ futures

    17,539.75
    -7.50 (-0.04%)
     

  • VOLATILITY

    18.00
    -0.21 (-1.15%)
     

  • FTSE

    7,877.05
    +29.06 (+0.37%)
     

  • NIKKEI 225

    38,079.70
    +117.90 (+0.31%)
     

  • CAD/EUR

    0.6822
    +0.0020 (+0.29%)
     

Should We Be Delighted With Howmet Aerospace Inc.'s (NYSE:HWM) ROE Of 13%?

Simply Wall St
·3 min read

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. By way of learning-by-doing, we'll look at ROE to gain a better understanding of Howmet Aerospace Inc. (NYSE:HWM).

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Howmet Aerospace

How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

ADVERTISEMENT

So, based on the above formula, the ROE for Howmet Aerospace is:

13% = US$435m ÷ US$3.3b (Based on the trailing twelve months to September 2022).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.13.

Does Howmet Aerospace Have A Good ROE?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. Pleasingly, Howmet Aerospace has a superior ROE than the average (10%) in the Aerospace & Defense industry.

roe
roe

That is a good sign. With that said, a high ROE doesn't always indicate high profitability. Aside from changes in net income, a high ROE can also be the outcome of high debt relative to equity, which indicates risk. To know the 2 risks we have identified for Howmet Aerospace visit our risks dashboard for free.

How Does Debt Impact ROE?

Virtually all companies need money to invest in the business, to grow profits. That cash can come from issuing shares, retained earnings, or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

Howmet Aerospace's Debt And Its 13% ROE

It's worth noting the high use of debt by Howmet Aerospace, leading to its debt to equity ratio of 1.27. While its ROE is pretty respectable, the amount of debt the company is carrying currently is not ideal. Debt does bring extra risk, so it's only really worthwhile when a company generates some decent returns from it.

Summary

Return on equity is one way we can compare its business quality of different companies. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have the same ROE, then I would generally prefer the one with less debt.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

But note: Howmet Aerospace may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here