With its stock down 4.3% over the past three months, it is easy to disregard A. O. Smith (NYSE:AOS). 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 A. O. Smith’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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for A. O. Smith is:
29% = US$531m ÷ US$1.8b (Based on the trailing twelve months to September 2025).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.29 in profit.
See our latest analysis for A. O. Smith
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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
First thing first, we like that A. O. Smith has an impressive ROE. Additionally, the company’s ROE is higher compared to the industry average of 14% which is quite remarkable. This likely paved the way for the modest 7.5% net income growth seen by A. O. Smith over the past five years.
As a next step, we compared A. O. Smith’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 14% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is AOS worth today? The intrinsic value infographic in our free research report helps visualize whether AOS is currently mispriced by the market.
