Yahoo Finance Clinigen Group plc's (LON:CLIN) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?
Clinigen Group's (LON:CLIN) stock is up by a considerable 8.0% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Clinigen Group's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Clinigen Group
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Clinigen Group is:
3.1% = UK£14m ÷ UK£446m (Based on the trailing twelve months to June 2020).
The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.03 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Clinigen Group's Earnings Growth And 3.1% ROE
It is hard to argue that Clinigen Group's ROE is much good in and of itself. Even when compared to the industry average of 8.1%, the ROE figure is pretty disappointing. Clinigen Group was still able to see a decent net income growth of 18% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Clinigen Group'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 40% in the same period.
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 CLIN fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Clinigen Group Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 65% (or a retention ratio of 35%) for Clinigen Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Additionally, Clinigen Group has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 12% over the next three years. The fact that the company's ROE is expected to rise to 21% over the same period is explained by the drop in the payout ratio.
Conclusion
Overall, we have mixed feelings about Clinigen Group. While no doubt its earnings growth is pretty respectable, the low profit retention could mean that the company's earnings growth could have been higher, had it been paying reinvesting a higher portion of its profits. An improvement in its ROE could also help future earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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