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With its stock down 25% over the past three months, it is easy to disregard CENIT (ETR:CSH). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to CENIT's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for CENIT
How Do You Calculate Return On Equity?
ROE 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 CENIT is:
7.3% = €3.7m ÷ €50m (Based on the trailing twelve months to September 2024).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.07 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
CENIT's Earnings Growth And 7.3% ROE
At first glance, CENIT's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 15% either. Therefore, CENIT's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared CENIT's net income growth with the industry and discovered that the industry saw an average growth of 7.2% 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about CENIT's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is CENIT Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 63% (implying that the company keeps only 37% of its income) of its business to reinvest into its business), most of CENIT's profits are being paid to shareholders, which explains the absence of growth in earnings.