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Cedar Woods Properties (ASX:CWP) has had a rough three months with its share price down 7.8%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Cedar Woods Properties' ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Cedar Woods Properties
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Cedar Woods Properties is:
5.9% = AU$24m ÷ AU$408m (Based on the trailing twelve months to December 2021).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.06 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of Cedar Woods Properties' Earnings Growth And 5.9% ROE
When you first look at it, Cedar Woods Properties' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.4%, so we won't completely dismiss the company. But then again, Cedar Woods Properties' five year net income shrunk at a rate of 10%. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.
Next, on comparing with the industry net income growth, we found that Cedar Woods Properties' earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 10% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Cedar Woods Properties fairly valued compared to other companies? These 3 valuation measures might help you decide.