The York Water Company (NASDAQ:YORW) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
York Water (NASDAQ:YORW) has had a rough three months with its share price down 5.3%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on York Water's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for York Water
How Is ROE Calculated?
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 York Water is:
11% = US$17m ÷ US$151m (Based on the trailing twelve months to September 2021).
The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.11.
Why Is ROE Important For 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. 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.
York Water's Earnings Growth And 11% ROE
To begin with, York Water seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.7%. Consequently, this likely laid the ground for the decent growth of 7.6% seen over the past five years by York Water.
As a next step, we compared York Water's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.6% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is York Water fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is York Water Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 59% (or a retention ratio of 41%) for York Water suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, York Water has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Conclusion
On the whole, we do feel that York Water has some positive attributes. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of York Water's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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.
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