CFM Holdings' (Catalist:5EB) stock up by 3.0% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on CFM Holdings' ROE.
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.
View our latest analysis for CFM Holdings
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for CFM Holdings is:
52% = S$11m ÷ S$21m (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.52.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
CFM Holdings' Earnings Growth And 52% ROE
Firstly, we acknowledge that CFM Holdings has a significantly high ROE. Secondly, even when compared to the industry average of 9.5% the company's ROE is quite impressive. Under the circumstances, CFM Holdings' considerable five year net income growth of 85% was to be expected.
We then compared CFM Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is CFM Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is CFM Holdings Efficiently Re-investing Its Profits?
CFM Holdings' ' three-year median payout ratio is on the lower side at 3.1% implying that it is retaining a higher percentage (97%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.