It’s hard to get excited after looking at the recent performance of Core & Main (NYSE:CNM), as its stock is down 9.0% in the past three months. However, a closer look at his sound finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. In this article, we decided to focus on Core & Main’s ROE.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for Core & Main
How do you calculate return on equity?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Core & Main is:
17% = $335m ÷ $2.0bn (based on trailing 12 months to May 2022).
The “yield” is the amount earned after tax over the last twelve months. This means that for every dollar of shareholders’ equity, the company generated $0.17 in profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Growth in Core & Main earnings and ROE of 17%
At first glance, Core & Main seems to have a decent ROE. Regardless, the company’s ROE is still well below the industry average of 23%. However, we are pleased to see Core & Main’s impressive 38% net profit growth over the past five years. Therefore, there could be other causes behind this growth. Such as – high revenue retention or effective management in place. Keep in mind that the company has a respectable ROE. It’s just that the industry’s ROE is higher. So that certainly provides some context to the strong earnings growth the company is seeing.
As a next step, we compared Core & Main’s net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 14%.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Is the CNM correctly valued? This intrinsic business value infographic has everything you need to know.
Does Core & Main use its profits efficiently?
Core & Main does not pay any dividends to its shareholders, meaning the company has reinvested all of its profits back into the business. This is probably what explains the strong earnings growth discussed above.
Overall, we’re pretty happy with Core & Main’s performance. In particular, we appreciate the fact that the company reinvests heavily in its business at a moderate rate of return. Unsurprisingly, this led to impressive earnings growth. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.