Cryosite Limited's (ASX:CTE) Stock Is Going Strong: Is the Market Following Fundamentals?

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

Sat, Jun 1, 2024, 5:21 PM 3 min read

Cryosite's (ASX:CTE) stock is up by a considerable 67% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Cryosite'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Cryosite

How Is ROE Calculated?

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 Cryosite is:

54% = AU$1.6m ÷ AU$2.9m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.54 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Cryosite's Earnings Growth And 54% ROE

Firstly, we acknowledge that Cryosite has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 9.4% which is quite remarkable. So, the substantial 25% net income growth seen by Cryosite over the past five years isn't overly surprising.

As a next step, we compared Cryosite's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 20%.

past-earnings-growth — ASX:CTE Past Earnings Growth June 1st 2024

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 CTE fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Cryosite Making Efficient Use Of Its Profits?

Cryosite has a three-year median payout ratio of 39% (where it is retaining 61% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Cryosite is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Cryosite has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Cryosite's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for Cryosite visit our risks dashboard for free.

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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.