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CPT Global (ASX:CGO) has had a great run on the share market with its stock up by a significant 77% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on CPT Global's ROE.
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.
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 CPT Global is:
61% = AU$2.7m ÷ AU$4.4m (Based on the trailing twelve months to December 2020).
The 'return' is the profit over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.61.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of CPT Global's Earnings Growth And 61% ROE
First thing first, we like that CPT Global has an impressive ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. So, the substantial 40% net income growth seen by CPT Global over the past five years isn't overly surprising.
Next, on comparing CPT Global's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 34% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is CPT Global fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is CPT Global Making Efficient Use Of Its Profits?
CPT Global has a really low three-year median payout ratio of 12%, meaning that it has the remaining 88% left over to reinvest into its business. So it looks like CPT Global is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Besides, CPT Global has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Overall, we are quite pleased with CPT Global's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 4 risks we have identified for CPT Global visit our risks dashboard for free.
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.
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