Reliance Worldwide Corporation Limited's (ASX:RWC) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

editorial-team@simplywallst.com (Simply Wall St)

Mon, May 12, 2025, 7:15 PM 4 min read

Reliance Worldwide (ASX:RWC) has had a great run on the share market with its stock up by a significant 17% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Reliance Worldwide's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 Reliance Worldwide is:

9.9% = US$126m ÷ US$1.3b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.10.

See our latest analysis for Reliance Worldwide

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Reliance Worldwide's Earnings Growth And 9.9% ROE

When you first look at it, Reliance Worldwide's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.9%. Even so, Reliance Worldwide has shown a fairly decent growth in its net income which grew at a rate of 8.0%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Reliance Worldwide's reported growth was lower than the industry growth of 11% over the last few years, which is not something we like to see.

past-earnings-growth — ASX:RWC Past Earnings Growth May 13th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is RWC worth today? The intrinsic value infographic in our free research report helps visualize whether RWC is currently mispriced by the market.

Is Reliance Worldwide Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 53% (or a retention ratio of 47%) for Reliance Worldwide suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Reliance Worldwide is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 27% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 12%, over the same period.

Summary

Overall, we have mixed feelings about Reliance Worldwide. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.