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It is hard to get excited after looking at Computacenter's (LON:CCC) recent performance, when its stock has declined 7.4% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Computacenter'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Is ROE Calculated?
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 Computacenter is:
27% = UK£184m ÷ UK£691m (Based on the trailing twelve months to June 2021).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.27 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Computacenter's Earnings Growth And 27% ROE
First thing first, we like that Computacenter has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. So, the substantial 20% net income growth seen by Computacenter over the past five years isn't overly surprising.
Next, on comparing Computacenter's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is CCC worth today? The intrinsic value infographic in our free research report helps visualize whether CCC is currently mispriced by the market.
Is Computacenter Using Its Retained Earnings Effectively?
Computacenter's three-year median payout ratio is a pretty moderate 35%, meaning the company retains 65% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Computacenter is reinvesting its earnings efficiently.
Besides, Computacenter has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 40%. Still, forecasts suggest that Computacenter's future ROE will drop to 20% even though the the company's payout ratio is not expected to change by much.
In total, we are pretty happy with Computacenter's performance. 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. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
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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.