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With the stock down 22% over the past three months, Crimson Tide (LON: TIDE) is easy to ignore. However, if you look carefully, you might find that key financial indicators look pretty decent, which could mean the stock could potentially go up over the long term, as markets typically reward more resilient long-term fundamentals. In particular, we decided to examine the Crimson Tides ROE in this article.
ROE, or return on equity, is a useful tool for assessing how effectively a company can generate returns on the investments received from its shareholders. In other words, it shows the company’s success in turning shareholder investments into profits.
Check out our latest analysis for Crimson Tide
How do you calculate the return on equity?
the Formula for ROE is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Crimson Tide is:
7.6% = £ 763k ÷ £ 10.0m (based on the last 12 months ended June 2021).
The “return” is the annual profit. That means the company made £ 0.08 in profit for every £ 1 worth of equity.
What does ROE have to do with earnings growth?
So far we have learned that the ROE measures how efficiently a company generates its profits. Depending on how much of these profits the company reinvests or “withholds” and how effectively this is done, we can then estimate the earnings growth potential of a company. In general, all other things being equal, companies with high ROE and retained earnings will grow faster than companies that do not share these attributes.
A side-by-side comparison of Crimson Tide’s earnings growth and 7.6% ROE
At first glance, the Crimson Tide ROE doesn’t look that attractive. However, the ROE is in line with the industry average of 9.5%, so we’re not going to lay off the company entirely. Additionally, we’re excited to see that Crimson Tide’s net income has increased significantly by 23% over the past five years. Given the slightly low ROE, it is likely that this growth will be driven by several other factors. Such as – high profit retention or efficient management.
Next, when we compared it to industry net income growth, we found that Crimson Tide’s growth is quite high compared to the industry’s average 3.9% growth over the same period, which is great to see.
Earnings growth is an important metric to consider when evaluating a stock. Next, investors need to determine whether or not expected earnings growth is already included in the stock price. That way, they can determine whether the future of the stock looks promising or ominous. If you’re wondering about Crimson Tide’s valuation, check out this price-earnings ratio versus its industry.
Is Crimson Tide reinvesting its profits efficiently?
Crimson Tide doesn’t pay its shareholders a dividend, which means the company has reinvested all of its profits into the company. This is likely the reason for the high earnings growth numbers discussed above.
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Overall, we think Crimson Tide has some positive qualities. With a high reinvestment rate, albeit with a low ROE, the company has succeeded in significantly increasing its earnings. With this in mind, according to the latest forecasts from industry analysts, the company’s profits are expected to shrink in the future. To learn more about the latest analyst forecast for the company, check out this analyst forecast visualization for the company.
This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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