With its inventory down 15% in the past three months, it’s easy to overlook Reliance Steel & Aluminum (NYSE: RS). However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we have decided to focus on the ROE of Reliance Steel & Aluminum.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest review for Reliance Steel & Aluminum
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Reliance Steel & Aluminum is:
15% = US $ 827 million ÷ US $ 5.6 billion (based on the last twelve months to June 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.15.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Reliance Steel & Aluminum profit growth and 15% ROE
For starters, Reliance Steel & Aluminum seems to have a respectable ROE. Even compared to the industry average of 17%, the company’s ROE looks quite decent. Therefore, this likely laid the groundwork for the decent 9.7% growth seen over the past five years by Reliance Steel & Aluminum.
As a next step, we compared Reliance Steel & Aluminum’s net income growth with the industry and were disappointed to see that the company’s growth is below the industry average growth of 13% over the course of the same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. What is RS worth today? The intrinsic value infographic in our free research report helps to visualize whether RS is currently being poorly priced by the market.
Is Reliance Steel & Aluminum Efficiently Reinvesting Its Profits?
Reliance Steel & Aluminum has a low three-year median payout rate of 23%, which means the company keeps the remaining 77% of its profits. This suggests that management is reinvesting most of the profits to grow the business.
In addition, Reliance Steel & Aluminum has paid dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 22%. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 12%.
Overall, we are very happy with the performance of Reliance Steel & Aluminum. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience good profit growth. That said, looking at current analysts’ estimates, we were concerned that while the company has increased profits in the past, analysts expect its profits to decline in the future. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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