With its stock down 27% over the past three months, it is easy to disregard Dow (NYSE:DOW). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Dow's  ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Our free stock report includes 4 warning signs investors should be aware of before investing in Dow. Read for free now.

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 Dow is:

2.2% = US$373m ÷ US$17b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.02 in profit.

Check out our latest analysis for Dow

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Dow's Earnings Growth And 2.2% ROE

It is quite clear that Dow's ROE is rather low. Not just that, even compared to the industry average of 11%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by Dow over the past five years could probably be the result of it having a lower ROE.

We then compared Dow's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.7% in the same 5-year period, which is a bit concerning.NYSE:DOW Past Earnings Growth May 22nd 2025

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is DOW worth today? The  intrinsic value infographic in our free research report  helps visualize whether DOW is currently mispriced by the market.

Story Continues

Is Dow Efficiently Re-investing Its Profits?

Dow has a very high three-year median payout ratio of 153% over the last last three years, which suggests that the company is dipping into more than just its earnings to pay its dividend. The absence in growth is therefore not surprising. Paying a dividend higher than reported profits is not a sustainable move. This is quite a risky position to be in.  Our risks dashboard should have the 4 risks we have identified for Dow.

Additionally, Dow has paid dividends over a period of six years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 119% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 11%, over the same period.

Summary

In total, we would have a hard think before deciding on any investment action concerning Dow. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this freereport 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.

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