Cairn Homes (LON:CRN) stock has risen 6.3% over the past three months. As most know, long-term fundamentals have a strong correlation with market price movements, so we decided to take a look at key business financial indicators today to see if they have a role to play. play in the recent price movement. Specifically, we decided to study the ROE of Cairn Homes in this article.
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 short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
Check out our latest analysis for Cairn Homes
How is ROE calculated?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Cairn Homes is:
5.6% = €43m ÷ €779m (based on the last twelve months until December 2021).
The “yield” is the amount earned after tax over the last twelve months. This means that for every £1 of equity, the company generated £0.06 of profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. 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. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Cairn Homes earnings growth and ROE of 5.6%
At first glance, Cairn Homes’ ROE does not look very promising. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 11%. Despite this, Cairn Homes has been able to grow its net income significantly, at a rate of 30% over the past five years. Therefore, there could be other reasons behind this growth. Such as – high revenue retention or effective management in place.
Then, comparing with the industry net income growth, we found that the growth figure reported by Cairn Homes compares quite favorably to the industry average, which shows an 8.2% decline over the of the same period.
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. This then helps them determine whether the action is placed for a bright or bleak future. If you’re wondering about the valuation of Cairn Homes, check out this indicator of its price/earnings ratio, relative to its sector.
Does Cairn Homes effectively reinvest its profits?
Cairn Homes’ median three-year payout ratio is a rather moderate 42%, meaning the company retains 58% of its revenue. So it looks like Cairn Homes is effectively reinvesting to see impressive earnings growth (discussed above) and paying out a well-covered dividend.
In addition, Cairn Homes pays dividends over a three-year period. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 45%. However, Cairn Homes’ ROE is expected to reach 12% despite no expected change in its payout ratio.
All in all, it seems that Cairn Homes has positive aspects for its business. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. The latest forecasts from industry analysts show that the company should maintain its current growth rate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization 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.