Shares of Raytheon Technologies Corporation (NYSE:RTX) are falling: are they the cause?
It’s hard to get excited after watching the recent performance of Raytheon Technologies (NYSE: RTX), as its stock is down 2.6% in the past three months. We decided to study company financials to determine if the downtrend will continue, as a company’s long-term performance usually dictates market outcomes. In particular, we’ll be paying attention to Raytheon Technologies’ ROE today.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Raytheon Technologies
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Raytheon Technologies’ ROE is:
6.5% = US$4.7 billion ÷ US$72 billion (based on trailing 12 months to June 2022).
“Yield” refers to a company’s earnings over the past year. This therefore means that for every $1 of investment by its shareholder, the company generates a profit of $0.07.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Raytheon Technologies’ earnings growth and ROE of 6.5%
At first glance, Raytheon Technologies’ ROE does not look very promising. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 10%. Given the circumstances, the significant decline in net income of 19% experienced by Raytheon Technologies over the past five years is not surprising. However, there could also be other factors leading to lower income. Such as – low income retention or poor capital allocation.
So, in a next step, we benchmarked Raytheon Technologies’ performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 2, 2% over the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. Is Raytheon Technologies correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Raytheon Technologies effectively reinvest its profits?
With a high three-year median payout ratio of 71% (implying 29% of earnings retained), most of Raytheon Technologies’ earnings are paid out to shareholders, which explains the company’s declining earnings. The company has only a small pool of capital left to reinvest – A vicious circle that does not benefit the company in the long run.
Additionally, Raytheon Technologies has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 39% over the next three years. As a result, the expected decline in Raytheon Technologies’ payout ratio explains the company’s expected future ROE rise to 12% over the same period.
Overall, Raytheon Technologies’ performance is quite disappointing. Because the company does not reinvest much in the business and given the low ROE, it is not surprising to see the lack or absence of profit growth. That said, we studied the latest analyst forecasts and found that while the company has cut earnings in the past, analysts expect earnings to increase in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.