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Collectors Universe, Inc.'s (NASDAQ:CLCT) Stock Is Going Strong: Have Financials A Role To Play?

Collectors Universe (NASDAQ:CLCT) has had a great run on the share market with its stock up by a significant 107% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Collectors Universe's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Collectors Universe

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Collectors Universe is:

47% = US$11m ÷ US$23m (Based on the trailing twelve months to March 2020).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.47 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Collectors Universe's Earnings Growth And 47% ROE

First thing first, we like that Collectors Universe has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. Probably as a result of this, Collectors Universe was able to see a decent net income growth of 6.2% over the last five years.

Next, on comparing with the industry net income growth, we found that Collectors Universe's reported growth was lower than the industry growth of 17% in the same period, which is not something we like to see.

NasdaqGM:CLCT Past Earnings Growth June 26th 2020
NasdaqGM:CLCT Past Earnings Growth June 26th 2020

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Collectors Universe's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Collectors Universe Using Its Retained Earnings Effectively?

The really high three-year median payout ratio of 113% for Collectors Universe suggests that the company is paying its shareholders more than what it is earning. However, this hasn't really hampered its ability to grow as we saw earlier. That being said, the high payout ratio could be worth keeping an eye on in case the company is unable to keep up its current growth momentum. You can see the 3 risks we have identified for Collectors Universe by visiting our risks dashboard for free on our platform here.

Besides, Collectors Universe has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Collectors Universe has some positive attributes. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on Collectors Universe and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.

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