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CVS Group (LON:CVSG) has had a great run on the share market with its stock up by a significant 6.2% over the last week. 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. Particularly, we will be paying attention to CVS Group's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for CVS Group
How Do You 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 CVS Group is:
12% = UK£26m ÷ UK£205m (Based on the trailing twelve months to December 2021).
The 'return' is the yearly profit. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.12 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of CVS Group's Earnings Growth And 12% ROE
To begin with, CVS Group seems to have a respectable ROE. Especially when compared to the industry average of 10.0% the company's ROE looks pretty impressive. This certainly adds some context to CVS Group's decent 16% net income growth seen over the past five years.
As a next step, we compared CVS Group'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 16% 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. Doing so will help them establish if the stock's future looks promising or ominous. Is CVSG fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is CVS Group Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 37% (implying that the company retains 63% of its profits), it seems that CVS Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.