Most readers would already know that Reliance Steel & Aluminum's (NYSE:RS) stock increased by 6.5% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Reliance Steel & Aluminum's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Reliance Steel & Aluminum
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 Reliance Steel & Aluminum is:
28% = US$1.9b ÷ US$6.9b (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.28.
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Firstly, we acknowledge that Reliance Steel & Aluminum has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 21% which is quite remarkable. Under the circumstances, Reliance Steel & Aluminum's considerable five year net income growth of 23% was to be expected.
We then performed a comparison between Reliance Steel & Aluminum's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 28% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is RS worth today? The intrinsic value infographic in our free research report helps visualize whether RS is currently mispriced by the market.
Reliance Steel & Aluminum has a really low three-year median payout ratio of 23%, meaning that it has the remaining 77% left over to reinvest into its business. So it looks like Reliance Steel & Aluminum is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, Reliance Steel & Aluminum has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 19% over the next three years. Regardless, the future ROE for Reliance Steel & Aluminum is predicted to decline to 14% despite the anticipated decrease in the payout ratio. We reckon that there could probably be other factors that could be driving the forseen decline in the company's ROE.
In total, we are pretty happy with Reliance Steel & Aluminum's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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.
Find out whether Reliance Steel & Aluminum is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis. Find out more about our editorial guidelines and team.
Reliance Steel & Aluminum Co. operates as a diversified metal solutions provider and the metals service center company in the United States, Canada, and internationally.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with outstanding track record and pays a dividend.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis. Find out more about our editorial guidelines and team.
Reliance Steel & Aluminum Co. operates as a diversified metal solutions provider and the metals service center company in the United States, Canada, and internationally.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with outstanding track record and pays a dividend.
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