It is easy to overlook BorgWarner’s (NYSE:BWA) given its unimpressive and roughly flat price performance over the past month. Looking at its differing financials, we wonder if the market is focusing more on the company’s negatives than on the positives resulting in the stock’s drab performance. Specifically, we decided to study BorgWarner’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for BorgWarner is:
3.1% = US$190m ÷ US$6.2b (Based on the trailing twelve months to September 2025).
The ‘return’ is the profit over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.03 in profit.
Check out our latest analysis for BorgWarner
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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.
As you can see, BorgWarner’s ROE looks pretty weak. Not just that, even compared to the industry average of 10%, the company’s ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 4.8% seen by BorgWarner over the last five years is not surprising. We reckon that there could also be other factors at play here. Such as – low earnings retention or poor allocation of capital.
However, when we compared BorgWarner’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 14% in the same period. This is quite worrisome.
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. Doing so will help them establish if the stock’s future looks promising or ominous. What is BWA worth today? The intrinsic value infographic in our free research report helps visualize whether BWA is currently mispriced by the market.
Looking at its three-year median payout ratio of 25% (or a retention ratio of 75%) which is pretty normal, BorgWarner’s declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In addition, BorgWarner has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 13% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 16%, over the same period.
In total, we’re a bit ambivalent about BorgWarner’s performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.