In This Article:
Most readers would already know that Cranswick's (LON:CWK) stock increased by 5.9% 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. Specifically, we decided to study Cranswick's ROE in this article.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Cranswick
How To Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Cranswick is:
12% = UK£113m ÷ UK£912m (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.12 in profit.
What Has ROE Got To Do With 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.
A Side By Side comparison of Cranswick's Earnings Growth And 12% ROE
At first glance, Cranswick seems to have a decent ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. This probably goes some way in explaining Cranswick's moderate 11% growth over the past five years amongst other factors.
As a next step, we compared Cranswick's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 9.0% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for CWK? You can find out in our latest intrinsic value infographic research report.
Is Cranswick Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 38% (implying that the company retains 62% of its profits), it seems that Cranswick is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.