Cryosite (ASX:CTE) shares have risen a hefty 67% in the past three months. Since the market often pays for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. Specifically, we decided to study cryosite ROE in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In other words, it is a profitability index that measures the rate of return on the capital contributed by the company's shareholders.
See our latest analysis for cryosite
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net profit (from continuing operations) รท Shareholders' equity
So according to the above formula, the ROE of cryosite is:
54% = 1.6 million Australian dollars รท 2.9 million Australian dollars (based on the trailing twelve months to December 2023).
The 'return' is the annual profit. Another way to think about it is that for every AU$1 worth of equity, the company was able to make AU$0.54 in profit.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company's profitability. Based on how much profit the company chooses to reinvest or "retain", we can evaluate a company's future ability to generate profits. Assuming everything else is equal, companies that have a higher return on equity and higher profit retention are usually the ones that have a higher growth rate compared to companies that don't have the same characteristics.
Cryosite Earnings Growth and 54% ROE
First, we recognize that cryosite has a significantly high ROE. Furthermore, the company's ROE is higher compared to the industry average of 9.4%, which is quite notable. Therefore, the substantial 25% net income growth seen by Cryosite over the past five years isn't too surprising.
As a next step, we compared Cryosite's net income growth with the industry and fortunately, we found that the growth seen by the company is higher than the industry average growth of 20%.
The basis for assigning value to a company is linked, to a large extent, to the growth of its profits. It is 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 of โโwhether the population is heading towards clear blue waters or if swampy waters await them. Is CTE valued fairly? This company intrinsic value infographic It has everything you need to know.
Is cryosite making efficient use of its benefits?
Cryosite has a three-year median payout ratio of 39% (where it retains 61% of its income), which is neither too low nor too high. From the looks of it, the dividend is well covered and Cryosite is reinvesting its profits efficiently, as evidenced by its exceptional growth we discussed earlier.
Additionally, Cryosite has paid dividends over a period of at least ten years, meaning the company is very serious about sharing its profits with shareholders.
Conclusion
Overall, we think Cryosite's performance has been quite good. In particular, we like that the company is reinvesting heavily in its business and with a high rate of return. Unsurprisingly, this has led to impressive profit growth. If the company continues to grow its earnings as it has, that could have a positive impact on its share price, given how earnings per share influence share prices in the long term. Let's not forget that business risk is also one of the factors that affects stock price. Therefore, this is also an important area that investors should pay attention to before making a decision on any business. To learn about the 1 risk we have identified for cryosite visit our Risk panel for free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or financial situation. Our goal is to provide you with focused, long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
