Yahoo Finance Should Weakness in Cleanaway Waste Management Limited's (ASX:CWY) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
It is hard to get excited after looking at Cleanaway Waste Management's (ASX:CWY) recent performance, when its stock has declined 5.4% over the past week. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Cleanaway Waste Management
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 Cleanaway Waste Management is:
3.1% = AU$81m ÷ AU$2.6b (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.03 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
A Side By Side comparison of Cleanaway Waste Management's Earnings Growth And 3.1% ROE
It is quite clear that Cleanaway Waste Management's ROE is rather low. Even compared to the average industry ROE of 8.6%, the company's ROE is quite dismal. However, the moderate 5.7% net income growth seen by Cleanaway Waste Management over the past five years is definitely a positive. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing Cleanaway Waste Management's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 5.5% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for CWY? You can find out in our latest intrinsic value infographic research report.
Is Cleanaway Waste Management Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 73% (or a retention ratio of 27%) for Cleanaway Waste Management suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Cleanaway Waste Management has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 63%. Regardless, the future ROE for Cleanaway Waste Management is predicted to rise to 8.0% despite there being not much change expected in its payout ratio.
Conclusion
Overall, we feel that Cleanaway Waste Management certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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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