Most readers would already know that Park Aerospace's (NYSE:PKE) stock increased by 2.7% over the past week. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. In this article, we decided to focus on Park Aerospace's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Park Aerospace

How To 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 Park Aerospace is:

6.8% = US$7.3m ÷ US$107m (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Park Aerospace's Earnings Growth And 6.8% ROE

On the face of it, Park Aerospace's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 12%. Therefore, Park Aerospace's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Park Aerospace's net income growth with the industry and discovered that the industry saw an average growth of 11% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for PKE? You can find out in our latest intrinsic value infographic research report

Is Park Aerospace Using Its Retained Earnings Effectively?

Park Aerospace has a three-year median payout ratio as high as 105% meaning that the company is paying a dividend which is beyond its means. The absence of growth in Park Aerospace's earnings therefore, doesn't come as a surprise. Paying a dividend beyond their means is usually not viable over the long term. This is quite a risky position to be in. You can see the 3 risks we have identified for Park Aerospace by visiting our risks dashboard for free on our platform here.

Moreover, Park Aerospace has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, Park Aerospace's performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Up till now, we've only made a short study of the company's growth data. To gain further insights into Park Aerospace's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.