American States Water Company's (NYSE:AWR) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

American States Water (NYSE:AWR) has had a rough three months with its share price down 9.6%. 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. Particularly, we will be paying attention to American States Water's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 American States Water is:

13% = US$123m ÷ US$956m (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.13 in profit.

Check out our latest analysis for American States Water

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

American States Water's Earnings Growth And 13% ROE

At first glance, American States Water seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.9%. This certainly adds some context to American States Water's decent 8.1% net income growth seen over the past five years.

As a next step, we compared American States Water'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 8.1% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 American States Water is trading on a high P/E or a low P/E, relative to its industry.

Is American States Water Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 59% (or a retention ratio of 41%) for American States Water suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, American States Water has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 61% of its profits over the next three years.

Summary

In total, we are pretty happy with American States Water's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.