Declining Stock and Solid Fundamentals: Is The Market Wrong About Canterbury Park Holding Corporation (NASDAQ:CPHC)?
With its stock down 11% over the past three months, it is easy to disregard Canterbury Park Holding (NASDAQ:CPHC). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Canterbury Park Holding'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Canterbury Park Holding
How To 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 Canterbury Park Holding is:
15% = US$12m ÷ US$79m (Based on the trailing twelve months to June 2023).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.15 in profit.
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.
Canterbury Park Holding's Earnings Growth And 15% ROE
To begin with, Canterbury Park Holding seems to have a respectable ROE. Even when compared to the industry average of 16% the company's ROE looks quite decent. This certainly adds some context to Canterbury Park Holding's exceptional 27% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that Canterbury Park Holding's growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. 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. What is CPHC worth today? The intrinsic value infographic in our free research report helps visualize whether CPHC is currently mispriced by the market.
Is Canterbury Park Holding Using Its Retained Earnings Effectively?
Canterbury Park Holding has a really low three-year median payout ratio of 11%, meaning that it has the remaining 89% left over to reinvest into its business. So it looks like Canterbury Park Holding is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Canterbury Park Holding is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.
Summary
Overall, we are quite pleased with Canterbury Park Holding'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. You can see the 2 risks we have identified for Canterbury Park Holding by visiting our risks dashboard for free on our platform here.
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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.
