Broadwind (NASDAQ:BWEN) has had a tough three months, with its stock price falling 45%. However, the company’s fundamentals look quite good and its long-term financials are generally based on future market price movements. In particular, we will pay attention to Broadwind’s ROE today.
Return on equity or ROE is an important factor that a shareholder must consider as it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the return on capital provided by the company’s shareholders.
Check out our latest analysis for Broadwind
How is ROE calculated?
The Formula for ROE Is:
Return on equity = net profit (from continuing operations) ÷ equity
So, based on the above formula, the ROE for Broadwind is:
6.9% = $3.7M ÷ $54M (Based on trailing twelve months ended September 2023).
“Return” refers to a company’s profit over the last year. Another way to think of it is that for every dollar of equity, the company was able to generate a profit of $0.07.
What does ROE have to do with earnings growth?
So far we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of these profits the company reinvests or “retains” and how effectively it does so, we can then assess a company’s earnings growth potential. Assuming everything else stays the same, companies that have both a higher return on equity and higher profit retention are typically the ones that have a higher growth rate compared to companies that don’t have the same characteristics.
Broadwind’s earnings growth and 6.9% ROE
On the surface, Broadwind’s ROE isn’t particularly noteworthy. A quick further study shows that the company’s ROE also doesn’t compare favorably to the industry average of 15%. Still, Broadwind surprisingly posted exceptional net income growth of 39% over the last five years. We assume that other factors could play a role here. For example, it is possible that management has made some good strategic decisions or that the company has a low payout ratio.
As a next step, we compared Broadwind’s net income growth to the industry and, encouragingly, found that the company’s growth is higher than the average industry growth of 13%.
Earnings growth is an important factor in stock valuation. The investor should try to find out whether the expected growth or decline in earnings (as the case may be) is priced in. This then helps him determine whether the stock is suitable for a bright or bleak future. Is Broadwind fairly valued compared to other companies? These 3 evaluation criteria could help you decide.
Is Broadwind using its profits efficiently?
Broadwind doesn’t currently pay a dividend, which essentially means the company has reinvested all of its profits back into the business. This definitely contributes to the high earnings growth we discussed above.
Overall, we think Broadwind definitely has some positive factors to consider. With a high reinvestment rate, albeit with a low ROE, the company has seen a significant increase in profits. According to the latest forecasts from industry analysts, the company’s profits are therefore likely to shrink in the future. Are these analyst expectations based on general industry expectations or on company fundamentals? Click here to go to our analyst forecasts page for the company.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.