Yahoo Finance Is Chesapeake Utilities Corporation's (NYSE:CPK) Stock's Recent Performance A Reflection Of Its Financial Health?
Chesapeake Utilities' (NYSE:CPK) stock is up by 8.6% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Chesapeake Utilities' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Chesapeake Utilities
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 Chesapeake Utilities is:
11% = US$90m ÷ US$833m (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.11 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Chesapeake Utilities' Earnings Growth And 11% ROE
To start with, Chesapeake Utilities' ROE looks acceptable. Especially when compared to the industry average of 8.8% the company's ROE looks pretty impressive. This probably laid the ground for Chesapeake Utilities' moderate 9.0% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Chesapeake Utilities' growth is quite high when compared to the industry average growth of 6.4% 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. Is Chesapeake Utilities fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Chesapeake Utilities Efficiently Re-investing Its Profits?
Chesapeake Utilities has a three-year median payout ratio of 41%, which implies that it retains the remaining 59% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Besides, Chesapeake Utilities has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 43%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 11%.
Summary
On the whole, we feel that Chesapeake Utilities' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
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