Yahoo Finance Are Poor Financial Prospects Dragging Down CPPGroup Plc (LON:CPP Stock?
It is hard to get excited after looking at CPPGroup's (LON:CPP) recent performance, when its stock has declined 34% over the past three months. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on CPPGroup'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.
See our latest analysis for CPPGroup
How Do You 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 CPPGroup is:
3.4% = UK£518k ÷ UK£15m (Based on the trailing twelve months to December 2021).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.03 in profit.
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.
CPPGroup's Earnings Growth And 3.4% ROE
At first glance, CPPGroup's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 12%. For this reason, CPPGroup's five year net income decline of 46% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.
As a next step, we compared CPPGroup's performance with the industry and found thatCPPGroup's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 2.9% in the same period, which is a slower than the company.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about CPPGroup's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is CPPGroup Using Its Retained Earnings Effectively?
CPPGroup's high LTM (or last twelve month) payout ratio of 1,466% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Its usually very hard to sustain dividend payments that are higher than reported profits. You can see the 3 risks we have identified for CPPGroup by visiting our risks dashboard for free on our platform here.
Only recently, CPPGroup stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 390% over the next three years.
Conclusion
Overall, we would be extremely cautious before making any decision on CPPGroup. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into CPPGroup's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.
