CSR Limited (ASX: CSR) stock on an uptrend: Could fundamentals be driving momentum?

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CSR (ASX: CSR) stock has risen 13% in the past three months. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In this article, we have decided to focus on the ROE of CSR.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for CSR

How to calculate return on equity?

The formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for CSR is:

24% = A $ 251 million ÷ A $ 1.0 billion (based on the last twelve months to September 2021).

The “return” is the income the business has earned over the past year. One way to conceptualize this is that for every Australian dollar of registered capital it has, the company has made a profit of 0.24 Australian dollars.

What does ROE have to do with profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

Growth in CSR profits and 24% ROE

First of all, we love that CSR has an impressive ROE. In addition, the company’s ROE is above the industry average of 9.7%, which is quite remarkable. Needless to say, we’re quite surprised to see that CSR’s bottom line has declined 3.2% over the past five years. Based on this, we believe that there might be other reasons that have not been discussed so far in this article that may be hampering the growth of the business. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.

We then compared the performance of CSR with that of the industry and found that the company reduced its profits at a slower rate than the profits of the industry which saw its profits decline by 11% over the course of the same period. This offers some relief to shareholders

ASX: CSR Past Profit Growth on November 23, 2021

Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. If you’re wondering how CSR is valued, check out this gauge of its price / earnings ratio, relative to its industry.

Is CSR Efficiently Using Its Retained Earnings?

With a high three-year median payout rate of 63% (implying that 37% of profits are retained), most of CSR’s profits go to shareholders, which explains the company’s decline in profits. With only a little money reinvested in the business, earnings growth would obviously be low or nonexistent.

Additionally, CSR has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of corporate growth. business. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 71%. Either way, CSR’s ROE is expected to drop to 18% despite no expected change in its payout ratio.

Summary

All in all, it seems that CSR has positive aspects for his business. However, we are disappointed to see a lack of earnings growth despite a high ROE. Keep in mind that the company reinvests a small portion of its profits, which means investors do not reap the benefits of the high rate of return. That said, we have studied the latest analysts’ forecast and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.


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