Is Crane NXT, Co.'s (NYSE:CXT) Recent Stock Performance Tethered To Its Strong Fundamentals?

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editorial-team@simplywallst.com (Simply Wall St)

Wed, Dec 18, 2024, 11:09 AM 3 min read

Most readers would already be aware that Crane NXT's (NYSE:CXT) stock increased significantly by 5.7% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Crane NXT's 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Crane NXT

How To 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 Crane NXT is:

16% = US$176m ÷ US$1.1b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.16 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Crane NXT's Earnings Growth And 16% ROE

At first glance, Crane NXT seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 10%. This certainly adds some context to Crane NXT's decent 13% net income growth seen over the past five years.

We then performed a comparison between Crane NXT's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same 5-year period.

past-earnings-growth — NYSE:CXT Past Earnings Growth December 18th 2024

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is CXT worth today? The intrinsic value infographic in our free research report helps visualize whether CXT is currently mispriced by the market.

Is Crane NXT Efficiently Re-investing Its Profits?

In Crane NXT's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 15% (or a retention ratio of 85%), which suggests that the company is investing most of its profits to grow its business.

While Crane NXT has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 15% of its profits over the next three years. However, Crane NXT's ROE is predicted to rise to 20% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with Crane NXT's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.