It's hard to get excited about CVS Group's (LON:CVSG) stock's recent performance, which has seen its share price drop 44% over the past three months. However, stock prices are usually driven by a company's long-term financial performance, which in this case looks very promising. Specifically, we decided to examine CVS Group's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. In other words, it is a rate of return that measures the rate of return on the capital provided by a company's shareholders.
Check out our latest analysis for CVS Group.
How do I calculate return on equity?
of Formula for calculating return on equity teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
Therefore, based on the above formula, CVS Group's ROE is:
13% = GBP 36m ÷ GBP 266m (Based on the trailing twelve months to December 2023).
“Return” refers to a company's earnings over the past year. One way he conceptualizes this is that for every £1 of shareholders' equity, the company made his £0.13 in profit.
What is the relationship between ROE and profit growth rate?
So far, we have learned that ROE measures how efficiently a company is generating its profits. We are then able to assess a company's future ability to generate profits based on how much of its profits it chooses to reinvest or “retain.” All else being equal, companies with higher return on equity and profit retention typically have higher growth rates compared to companies that don't have the same characteristics.
A side-by-side comparison of CVS Group's earnings growth and ROE of 13%.
Firstly, CVS Group seems to have a respectable ROE. Moreover, his ROE for the company is very good compared to the industry average of 8.2%. This certainly lends some context to CVS Group's exceptional net income growth of 35% over the past five years. However, there may be other causes behind this growth. Maintaining high profits and efficient management, etc.
We then compared CVS Group's net income growth to its industry. The same he found that the company's growth rate was high when compared to the industry where in five years he recorded a growth rate of 12%.
Earnings growth is an important metric to consider when evaluating a stock. In any case, investors should seek to determine whether expected earnings growth or decline has been factored in. Doing so will help you determine whether a stock's future is promising or ominous. Is CVS Group fairly valued compared to other companies? These three valuation metrics may help you decide.
Is CVS Group effectively reinvesting its profits?
CVS Group's median three-year dividend payout ratio is lower at 18%, meaning it retains a higher percentage of its profits (82%). Therefore, it appears that management is reinvesting profits heavily to grow the business, which is reflected in the earnings growth numbers.
Additionally, CVS Group has been paying dividends for at least 10 years. This shows that the company is committed to sharing profits with its shareholders. Researching the latest analyst consensus data, we found that the company's future dividend payout ratio is expected to decline to 9.0% over the next three years. As a result, CVS Group's expected lower dividend payout ratio explains why the company's future ROE is expected to rise to 19% over the same period.
summary
Overall, we are very satisfied with CVS Group's performance. In particular, we like that the company is reinvesting heavily in its business and has a high rate of return. Unsurprisingly, this led to impressive revenue growth. With that said, the company's revenue growth is expected to slow, as predicted by current analyst forecasts. Are these analyst forecasts based on broader expectations for the industry, or are they based on the company's fundamentals? Click here to be taken to the page with analyst forecasts for the company .
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
