HEICO's (NYSE:HEI) stock is up by a considerable 14% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to HEICO's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You Calculate Return On Equity?

ROE 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 HEICO is:

13% = US$487m ÷ US$3.8b (Based on the trailing twelve months to April 2024).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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.

HEICO's Earnings Growth And 13% ROE

To start with, HEICO's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This certainly adds some context to HEICO's moderate 6.2% net income growth seen over the past five years.

As a next step, we compared HEICO's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 6.4% in the same period.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is HEI worth today? The intrinsic value infographic in our free research report helps visualize whether HEI is currently mispriced by the market.

Is HEICO Using Its Retained Earnings Effectively?

In HEICO's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 7.2% (or a retention ratio of 93%), which suggests that the company is investing most of its profits to grow its business.

Moreover, HEICO 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 over the next three years is expected to be approximately 6.4%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 14%.

Summary

On the whole, we feel that HEICO's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com