With its stock down 10% in the past three months, it’s easy to overlook California Water Service Group (NYSE: CWT). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we decided to focus on California Water Service Group’s ROE.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for California Water Service Group
How to calculate return on equity?
the return on equity formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for California Water Service Group is:
8.5% = $101 million ÷ $1.2 billion (based on trailing 12 months to December 2021).
The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.09.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
California Water Service Group Earnings Growth and 8.5% ROE
At first glance, there isn’t much to say about California Water Service Group’s ROE. Yet further investigation shows that the company’s ROE is similar to the industry average of 9.7%. That said, California Water Service Group has posted modest net income growth of 15% over the past five years. Considering that ROE is not particularly high, we believe that there could also be other factors at play that could influence the growth of the business. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
In a next step, we compared California Water Service Group’s net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 11%. .
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Is California Water Service Group fairly valued relative to other companies? These 3 assessment metrics might help you decide.
Does California Water Service Group use its profits effectively?
While California Water Service Group has a three-year median payout ratio of 55% (meaning it retains 45% of earnings), the company has still had good earnings growth in the past, meaning that its high payout ratio hasn’t hampered its ability to grow.
Additionally, California Water Service Group has paid dividends over a period of at least ten years, which means the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 53%. As a result, forecasts suggest that California Water Service Group’s future ROE will be 8.8%, which is again similar to today’s ROE.
Overall, we think California Water Service Group certainly has some positives to consider. While its earnings growth is undoubtedly quite significant, we believe that the reinvestment rate is quite low, which means that the earnings growth figure could have been significantly higher had the company retained a greater part of its profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.