Most readers would already be aware that Cairn Homes’ (LON:CRN) stock increased significantly by 14% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Cairn Homes’ ROE in this article.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
See our latest analysis for Cairn Homes
How To Calculate Return On Equity?
ROE 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 Cairn Homes is:
11% = €85m ÷ €757m (Based on the trailing twelve months to December 2023).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every £1 worth of shareholders’ equity, the company generated £0.11 in profit.
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. 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.
Cairn Homes’ Earnings Growth And 11% ROE
To start with, Cairn Homes’ ROE looks acceptable. Further, the company’s ROE is similar to the industry average of 9.9%. This probably goes some way in explaining Cairn Homes’ significant 22% net income growth over the past five years amongst other factors. However, there could also be other drivers behind this 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.
Given that the industry shrunk its earnings at a rate of 3.6% over the last few years, the net income growth of the company is quite impressive.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Cairn Homes fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Cairn Homes Making Efficient Use Of Its Profits?
Cairn Homes has a significant three-year median payout ratio of 65%, meaning the company only retains 35% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
Besides, Cairn Homes has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 39% over the next three years. As a result, the expected drop in Cairn Homes’ payout ratio explains the anticipated rise in the company’s future ROE to 16%, over the same period.
Conclusion
Overall, we are quite pleased with Cairn Homes’ performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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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.
