Flowserve Corporation's (NYSE:FLS) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
It is hard to get excited after looking at Flowserve's (NYSE:FLS) recent performance, when its stock has declined 3.7% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Flowserve's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Flowserve
How Do You Calculate Return On Equity?
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 Flowserve is:
13% = US$242m ÷ US$1.9b (Based on the trailing twelve months to March 2023).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.13 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Flowserve's Earnings Growth And 13% ROE
To begin with, Flowserve seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. This certainly adds some context to Flowserve's moderate 15% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Flowserve's growth is quite high when compared to the industry average growth of 8.3% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is FLS worth today? The intrinsic value infographic in our free research report helps visualize whether FLS is currently mispriced by the market.
Is Flowserve Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 70% (or a retention ratio of 30%) for Flowserve suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Flowserve has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 32% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.
Conclusion
Overall, we are quite pleased with Flowserve's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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