Could weak financials mean the market is correcting its share price?

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Raytheon Technologies (NYSE: RTX) has had a great run in the stock market with its stock rising 8.6% last month. However, we chose to pay close attention to weak financials as we doubt the current momentum will hold given the scenario. In particular, we decided to investigate Raytheon Technologies ROE in this article.

Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. Put simply, it evaluates the profitability of a company in relation to its equity.

Check out our latest analysis for Raytheon Technologies

How do you calculate the return on equity?

The ROE can be calculated using the formula:

Return on Equity = Net Income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Raytheon Technologies is:

3.2% = $ 2.3 billion $ 73 billion (based on the last twelve months through June 2021).

The “return” is the profit for the past twelve months. One way to conceptualize this is that for every $ 1 of shareholder equity the company made a profit of $ 0.03.

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 these profits the company reinvests or “withholds” and how effectively this is done, we can then estimate the earnings growth potential of a company. In general, all other things being equal, companies with high ROE and retained earnings will grow faster than companies that do not share these attributes.

Raytheon Technologies earnings growth and 3.2% ROE

It’s hard to argue that Raytheon Technologies’ ROE is very good in and of itself. Even compared to the industry’s average ROE of 13%, the company’s ROE is pretty grim. Therefore, it cannot be wrong to say that Raytheon Technologies’ 35% decline in net income over five years may be due to a lower ROE. We believe there could be other aspects that negatively affect the company’s earnings outlook. For example, that the company has poorly allocated the capital or that the company has a very high payout ratio.

As a next step, we compared Raytheon Technologies’ performance against the industry and were disappointed to find that while the company shrank profits, the industry grew 14% over the same period.

Past earnings growth

The basis for increasing the value of a company is largely linked to its earnings development. Next, investors need to determine whether or not expected earnings growth is already included in the stock price. That way, they can determine whether the future of the stock looks promising or ominous. What is RTX worth today? The intrinsic value infographic in our free research report helps visualize whether RTX is currently being mispriced by the market.

Is Raytheon Technologies Using Its Profits Efficiently?

Raytheon Technologies’ declining profits aren’t surprising considering the company spends most of its profits paying dividends as measured by its 3-year median payout ratio of 50% (or a retention ratio of 50%) . The company only has a small pool of capital left to reinvest – a vicious circle that does not benefit the company in the long term. Our risk dashboard should include the 3 risks that we have identified for Raytheon Technologies.

Additionally, Raytheon Technologies has paid dividends over a period of at least a decade, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. Our latest analyst data shows that the company’s future payout ratio is projected to decrease to 36% over the next three years. Accordingly, the expected decrease in the payout ratio explains the expected increase in the company’s ROE to 11% over the same period.

summary

Overall, we would be extremely careful before making a decision in favor of Raytheon Technologies. With the company not reinvesting much in the business, and given the low ROE, it is not surprising that there is no growth in its profits. The latest forecasts from industry analysts therefore show that analysts expect a huge improvement in the company’s earnings growth rate. To learn more about the company’s future earnings growth projections, take a look at this for free Report on analyst forecast for the company to learn more.

This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.

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