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Creative Realities (NASDAQ:CREX) has had a rough three months with its share price down 42%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Creative Realities' ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Creative Realities
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Creative Realities is:
2.6% = US$749k ÷ US$28m (Based on the trailing twelve months to September 2024).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.03.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
Creative Realities' Earnings Growth And 2.6% ROE
As you can see, Creative Realities' ROE looks pretty weak. Even when compared to the industry average of 12%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Creative Realities grew its net income at a significant rate of 41% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Creative Realities' 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 6.3%.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is Creative Realities fairly valued compared to other companies? These 3 valuation measures might help you decide.