Yahoo Finance Is Circa Enterprises Inc.'s(CVE:CTO) Recent Stock Performance Tethered To Its Strong Fundamentals?
Most readers would already be aware that Circa Enterprises' (CVE:CTO) stock increased significantly by 11% 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. Particularly, we will be paying attention to Circa Enterprises' ROE today.
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.
View our latest analysis for Circa Enterprises
How Do You Calculate Return On Equity?
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 Circa Enterprises is:
13% = CA$1.7m ÷ CA$13m (Based on the trailing twelve months to March 2021).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.13 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
A Side By Side comparison of Circa Enterprises' Earnings Growth And 13% ROE
At first glance, Circa Enterprises seems to have a decent ROE. Even when compared to the industry average of 13% the company's ROE looks quite decent. Consequently, this likely laid the ground for the impressive net income growth of 23% seen over the past five years by Circa Enterprises. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.
Next, on comparing Circa Enterprises' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% in the same period.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Circa Enterprises is trading on a high P/E or a low P/E, relative to its industry.
Is Circa Enterprises Using Its Retained Earnings Effectively?
The three-year median payout ratio for Circa Enterprises is 36%, which is moderately low. The company is retaining the remaining 64%. By the looks of it, the dividend is well covered and Circa Enterprises is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, Circa Enterprises has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.
Conclusion
Overall, we are quite pleased with Circa Enterprises' 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. Our risks dashboard would have the 3 risks we have identified for Circa Enterprises.
This article by Simply Wall St is general in nature. 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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