Cranswick (LON: CWK) stock is up 9.9% over the past three months. Since the market typically pays for a company’s long-term financial health, we decided to examine the company’s fundamentals to see if it could affect the market. Specifically, we have decided to study Cranswicks ROE in this article.
Return on equity, or ROE, is an important metric for assessing how efficiently a company’s management is using the company’s capital. In other words, it’s a profitability metric that measures the return on the capital provided by the company’s shareholders.
Check out our latest analysis for Cranswick
How is the ROE calculated?
The Formula for ROE is:
Return on Equity = Net Income (from continuing operations) Ã· Equity
So, based on the formula above, the ROE for Cranswick is:
13% = UK Â£ 93m UK Â£ 686m (based on the last 12 months through March 2021).
The âreturnâ is the profit for the past twelve months. Another way to imagine this is that for every Â£ 1 worth of equity, the company was able to make a profit of Â£ 0.13.
What is the Relationship Between ROE and Earnings Growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company can reinvest or “keep” for future growth, which then gives us an idea of ââthe company’s growth potential. 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.
Cranswick earnings growth and 13% ROE
At first glance, Cranswick seems to have a decent ROE. Compared to the industry’s average ROE of 8.2%, the company’s ROE looks pretty remarkable. This was likely the basis for Cranswick’s modest 10% net profit growth over the past five years.
We then compared Cranswick’s net profit growth to that of the industry and are pleased to see that the company has grown faster than the industry with a 3.0% growth rate over the same period.
Earnings growth is an important factor in valuing stocks. It is important for an investor to know if the market has priced in the company’s expected earnings growth (or decline). That way, they can determine whether the future of the stock looks promising or ominous. Is CWK rated fairly? These Infographic on the intrinsic value of the company has everything you need to know.
Is Cranswick using its retained earnings effectively?
With a three-year average payout ratio of 40% (meaning the company keeps 60% of its profits), Cranswick appears to be efficiently reinvesting, making respectable earnings growth and paying dividends well-covered.
Additionally, Cranswick has been paying dividends over a period of at least a decade, which means the company is pretty serious about sharing its profits with shareholders. While studying the latest analyst consensus data, we found that the company is expected to continue paying out around 37% of its earnings over the next three years. As a result, Cranswick’s ROE is unlikely to change significantly, which we derived from analysts’ estimates of 13% for future ROE.
Overall, we’re pretty happy with Cranswick’s performance. In particular, it’s great to see that the company has invested heavily in its business and this, along with a high return on investment, has resulted in significant earnings growth. However, as forecast in the latest analyst estimates, the company’s earnings growth is likely to slow. Are these analyst expectations based on broad industry expectations or company fundamentals? Click here to go to our analysts forecast page for the company.
This article from Simply Wall St is of a general nature. 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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