Yahoo Finance Is Cleanaway Waste Management Limited's (ASX:CWY) Recent Performance Underpinned By Weak Financials?
With its stock down 8.8% over the past month, it is easy to disregard Cleanaway Waste Management (ASX:CWY). 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 Cleanaway Waste Management's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Cleanaway Waste Management
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Cleanaway Waste Management is:
2.5% = AU$77m ÷ AU$3.0b (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.03 in profit.
What Has ROE Got To Do With 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Cleanaway Waste Management's Earnings Growth And 2.5% ROE
It is quite clear that Cleanaway Waste Management's ROE is rather low. Even when compared to the industry average of 4.8%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by Cleanaway Waste Management over the past five years could probably be the result of it having a lower ROE.
Next, on comparing with the industry net income growth, we found that Cleanaway Waste Management's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 1.2% 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 Cleanaway Waste Management fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Cleanaway Waste Management Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 75% (meaning, the company retains only 25% of profits) for Cleanaway Waste Management suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
Moreover, Cleanaway Waste Management has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 68% of its profits over the next three years. Still, forecasts suggest that Cleanaway Waste Management's future ROE will rise to 8.0% even though the the company's payout ratio is not expected to change by much.
Conclusion
In total, we would have a hard think before deciding on any investment action concerning Cleanaway Waste Management. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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