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Corby Spirit and Wine Limited (TSE:CSW.A) On An Uptrend: Could Fundamentals Be Driving The Stock?

Simply Wall St


Most readers would already know that Corby Spirit and Wine's (TSE:CSW.A) stock increased by 5.0% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Corby Spirit and Wine's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.


Check out our latest analysis for Corby Spirit and Wine

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Corby Spirit and Wine is:

16% = CA$27m ÷ CA$171m (Based on the trailing twelve months to March 2020).

The 'return' is the yearly profit. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.16 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Corby Spirit and Wine's Earnings Growth And 16% ROE

To start with, Corby Spirit and Wine's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. Corby Spirit and Wine's decent returns aren't reflected in Corby Spirit and Wine'smediocre five year net income growth average of 4.4%. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Corby Spirit and Wine's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 4.0% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Corby Spirit and Wine's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Corby Spirit and Wine Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 95% (that is, the company retains only 4.9% of its income) over the past three years for Corby Spirit and Wine suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, Corby Spirit and Wine has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we feel that Corby Spirit and Wine certainly does have some positive factors to consider. 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for Corby Spirit and Wine by visiting our risks dashboard for free on our platform here.

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.