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It is hard to get excited after looking at Cranswick's (LON:CWK) recent performance, when its stock has declined 13% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See 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:
13% = UK£104m ÷ UK£769m (Based on the trailing twelve months to March 2022).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.13 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 13% ROE
To start with, Cranswick's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by Cranswick.
Next, on comparing with the industry net income growth, we found that Cranswick's growth is quite high when compared to the industry average growth of 2.4% in the same period, which is great to see.
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). Doing so will help them establish if the stock's future looks promising or ominous. What is CWK worth today? The intrinsic value infographic in our free research report helps visualize whether CWK is currently mispriced by the market.
Is Cranswick Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 39% (implying that the company retains 61% 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.