U.S. markets closed
  • S&P Futures

    4,140.50
    -6.25 (-0.15%)
     
  • Dow Futures

    32,733.00
    -24.00 (-0.07%)
     
  • Nasdaq Futures

    13,213.00
    -15.75 (-0.12%)
     
  • Russell 2000 Futures

    1,919.50
    -2.30 (-0.12%)
     
  • Crude Oil

    89.25
    +0.24 (+0.27%)
     
  • Gold

    1,790.70
    -0.50 (-0.03%)
     
  • Silver

    19.87
    +0.03 (+0.14%)
     
  • EUR/USD

    1.0184
    -0.0003 (-0.03%)
     
  • 10-Yr Bond

    2.8400
    +0.1640 (+6.13%)
     
  • Vix

    21.15
    -0.29 (-1.35%)
     
  • GBP/USD

    1.2077
    +0.0006 (+0.05%)
     
  • USD/JPY

    135.2790
    +0.3090 (+0.23%)
     
  • BTC-USD

    23,303.53
    +315.23 (+1.37%)
     
  • CMC Crypto 200

    542.71
    +7.49 (+1.40%)
     
  • FTSE 100

    7,439.74
    -8.32 (-0.11%)
     
  • Nikkei 225

    28,241.09
    +65.22 (+0.23%)
     

Is Weakness In CSW Industrials, Inc. (NASDAQ:CSWI) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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

With its stock down 4.3% over the past month, it is easy to disregard CSW Industrials (NASDAQ:CSWI). 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. In this article, we decided to focus on CSW Industrials' ROE.

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 CSW Industrials

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 CSW Industrials is:

14% = US$67m ÷ US$484m (Based on the trailing twelve months to March 2022).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.14 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. 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. 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.

CSW Industrials' Earnings Growth And 14% ROE

To start with, CSW Industrials' ROE looks acceptable. Even so, when compared with the average industry ROE of 19%, we aren't very excited. However, the moderate 16% net income growth seen by CSW Industrials over the past five years is definitely a positive. So, there might be other aspects that are positively influencing earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also provides some context to the earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that CSW Industrials' growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. 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. What is CSWI worth today? The intrinsic value infographic in our free research report helps visualize whether CSWI is currently mispriced by the market.

Is CSW Industrials Efficiently Re-investing Its Profits?

CSW Industrials has a low three-year median payout ratio of 17%, meaning that the company retains the remaining 83% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, CSW Industrials has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with CSW Industrials' performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here