EnPro Industries, Inc. (NYSE:NPO) Stocks Wet Down But Fundamentals Look Decent: Will the Market Correct the Stock Price Going Forward?

EnPro Industries (NYSE:NPO) had a tough three months with its share price down 17%. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we’ll be paying attention to EnPro Industries’ ROE today.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for EnPro Industries

How to calculate return on equity?

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 for EnPro Industries is:

13% = $178 million ÷ $1.3 billion (based on trailing 12 months to December 2021).

The “yield” is the amount earned after tax over the last twelve months. This means that for every dollar of shareholders’ equity, the company generated $0.13 in profit.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

EnPro Industries Earnings Growth and ROE of 13%

For starters, EnPro Industries’ ROE looks acceptable. Even when compared to the industry average of 13%, the company’s ROE looks pretty decent. However, while EnPro Industries had a fairly respectable ROE, its five-year net income decline rate was 39%. So there could be other aspects that could explain this. These include poor revenue retention or poor capital allocation.

However, when we compared the growth of EnPro Industries with the industry, we found that although the company’s earnings declined, the industry saw earnings growth of 9.2% over the course of the year. the same period. It’s quite worrying.

NYSE: NPO Past Earnings Growth April 12, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is EnPro Industries fairly valued relative to other companies? These 3 assessment metrics might help you decide.

Does EnPro Industries make effective use of its retained earnings?

EnPro Industries’ low LTM (or Trailing Twelve Month) payout ratio of 13% (implying it keeps the remaining 87% of its earnings) is a surprise when you pair it with declining earnings. The low payout should mean that the company keeps most of its profits and therefore should see some growth. So there could be other explanations for this. For example, the company’s business may deteriorate.

Additionally, EnPro Industries has been paying dividends for seven years, which is a considerable amount of time, suggesting that management must have perceived that shareholders prefer consistent dividends even though profits have declined.

Summary

All in all, it seems that EnPro Industries has positive aspects for its business. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. Moreover, the latest forecasts from industry analysts show that the company is also likely to continue to experience a similar drop in earnings going forward. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Ian Crawford

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