Most readers should already know that the Colefax Group (LON: CFX) stock has risen significantly by 24% in the past three months. As most know, fundamentals usually determine long-term market price movements. So today we decided to examine the company’s key financial indicators to see if they are playing a role in recent price action. Specifically, we have decided to study Colefax Group ROE in this article.
Return on Equity, or ROE, is an important factor to consider as a shareholder telling them how effectively their capital will be reinvested. In simpler terms, it measures a company’s profitability in relation to equity.
Check out our latest analysis for the Colefax Group
How do you calculate the return on equity?
The Formula for return on equity is:
Return on Equity = Net Income (from continuing operations) Ã· Equity
So, based on the formula above, the ROE for the Colefax Group is:
7.6% = UK Â£ 2.3m Ã· UK Â£ 30m (based on the last 12 months through October 2020).
The âreturnâ is the profit for the past twelve months. That means the company made Â£ 0.08 in profit for every Â£ 1 worth of equity.
Why is ROE important to 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 âwithholdsâ and how effectively this is done, we can then estimate a company’s earnings 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.
A side-by-side comparison of Colefax Group’s earnings growth and 7.6% ROE
At first glance, there isn’t much to say about the Colefax Group’s ROE. What is interesting, however, is the fact that the company’s ROE is above the industry’s average ROE of 5.6%. However, the decline in Colefax Group’s net income over five years was 2.1%. Remember, the company has a slightly low ROE. It’s just that the industry’s ROE is lower. So that could be one of the factors causing earnings growth to shrink.
As a next step, we compared the Colefax Group’s performance against the industry and found that the Colefax Group’s performance is depressing even compared to the industry which has shrunk its profits by 0.4% over the same period, which is slower than that that of the company.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to figure out whether it is pricing in expected growth or decline in earnings, whatever the case. That way, they’ll have an idea of ââwhether the stock is getting into clear blue water or expecting boggy water. Is the Colefax Group fairly valued compared to other companies? These 3 evaluation criteria could help you decide.
Is Colefax Group Using Its Retained Profits Effectively?
While the company has paid out part of its dividend in the past, it doesn’t currently pay a dividend. This implies that potentially all of its profits will be reinvested in the company.
Overall, we think the Colefax Group has some positive qualities. However, we are disappointed that despite a moderate ROE and a high reinvestment rate, no earnings growth is recorded. We believe there could be some external factors that could negatively affect the business. However, given the latest analyst estimates, we’ve determined that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth projections, take a look at this free Report on analyst forecast for the company to learn more.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell shares 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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