U.S. markets open in 5 hours 21 minutes
  • S&P Futures

    4,519.00
    -9.00 (-0.20%)
     
  • Dow Futures

    35,399.00
    -78.00 (-0.22%)
     
  • Nasdaq Futures

    15,348.00
    -29.50 (-0.19%)
     
  • Russell 2000 Futures

    2,279.70
    -7.80 (-0.34%)
     
  • Crude Oil

    83.01
    -0.41 (-0.49%)
     
  • Gold

    1,783.00
    -1.90 (-0.11%)
     
  • Silver

    24.28
    -0.16 (-0.67%)
     
  • EUR/USD

    1.1640
    -0.0012 (-0.10%)
     
  • 10-Yr Bond

    1.6360
    0.0000 (0.00%)
     
  • Vix

    15.90
    +0.20 (+1.27%)
     
  • GBP/USD

    1.3808
    -0.0017 (-0.12%)
     
  • USD/JPY

    114.0620
    -0.2670 (-0.23%)
     
  • BTC-USD

    65,316.15
    +1,271.13 (+1.98%)
     
  • CMC Crypto 200

    1,539.44
    +58.64 (+3.96%)
     
  • FTSE 100

    7,200.83
    -22.27 (-0.31%)
     
  • Nikkei 225

    28,708.58
    -546.97 (-1.87%)
     

Is Constellation Software Inc.'s (TSE:CSU) Stock's Recent Performance A Reflection Of Its Financial Health?

  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Constellation Software's (TSE:CSU) stock up by 8.6% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Constellation Software'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Constellation Software

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Constellation Software is:

13% = US$173m ÷ US$1.3b (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.13.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Constellation Software's Earnings Growth And 13% ROE

To start with, Constellation Software's ROE looks acceptable. Even when compared to the industry average of 13% the company's ROE looks quite decent. This certainly adds some context to Constellation Software's moderate 14% net income growth seen over the past five years.

Next, on comparing Constellation Software's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% in the same period.

past-earnings-growth
past-earnings-growth

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. Doing so will help them establish if the stock's future looks promising or ominous. Is CSU fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Constellation Software Using Its Retained Earnings Effectively?

Constellation Software has a low three-year median payout ratio of 24%, meaning that the company retains the remaining 76% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, Constellation Software has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 7.0% over the next three years.

Summary

On the whole, we feel that Constellation Software's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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 (at) simplywallst.com.