Most readers already know that shares of CSW Industrials (NASDAQ:CSWI) are up a significant 17% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. Specifically, we decided to study the ROE of CSW Industrials in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for CSW Industrials
How is ROE calculated?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for CSW Industrials is:
16% = $76 million ÷ $482 million (based on trailing 12 months to June 2022).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.16.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of CSW Industrials earnings growth and 16% ROE
For starters, CSW Industrials appears to have a respectable ROE. Regardless, the company’s ROE is still well below the industry average of 24%. However, the moderate 16% growth in net income seen by CSW Industrials over the past five years is definitely positive. Thus, there could be other aspects that positively influence earnings growth. For example, the business has a low payout ratio or is efficiently managed. However, it’s worth remembering that the company has a decent ROE to start with, just that it’s below the industry average. So this also provides some context for the earnings growth the company is seeing.
We then compared the net income growth of CSW Industrials with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 13% in during the same period.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. Is the CSWI correctly valued? This intrinsic business value infographic has everything you need to know.
Does CSW Industrials effectively reinvest profits?
CSW Industrials’ three-year median payout ratio to shareholders is 16% (implying it retains 84% of its revenue), which is pretty low, so it looks like management is reinvesting profits heavily to grow. his activity.
Additionally, CSW Industrials paid dividends over a three-year period. This shows that the company is committed to sharing profits with its shareholders.
Overall, we believe CSW Industrials’ performance has been quite good. 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. The latest forecasts from industry analysts show that the company should maintain its current growth rate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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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.
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