Weyerhaeuser Company (NYSE:WY) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

·4 min read

Weyerhaeuser (NYSE:WY) has had a rough month with its share price down 17%. 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. Specifically, we decided to study Weyerhaeuser's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Weyerhaeuser

How Do You Calculate Return On Equity?

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 Weyerhaeuser is:

26% = US$2.7b ÷ US$10b (Based on the trailing twelve months to March 2022).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.26 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Weyerhaeuser's Earnings Growth And 26% ROE

First thing first, we like that Weyerhaeuser has an impressive ROE. Secondly, even when compared to the industry average of 6.5% the company's ROE is quite impressive. Under the circumstances, Weyerhaeuser's considerable five year net income growth of 40% was to be expected.

Next, on comparing with the industry net income growth, we found that Weyerhaeuser's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Weyerhaeuser is trading on a high P/E or a low P/E, relative to its industry.

Is Weyerhaeuser Using Its Retained Earnings Effectively?

Weyerhaeuser's three-year median payout ratio is a pretty moderate 37%, meaning the company retains 63% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Weyerhaeuser is reinvesting its earnings efficiently.

Moreover, Weyerhaeuser is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 93% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 13%) over the same period.

Conclusion

On the whole, we feel that Weyerhaeuser's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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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