Crown Crafts’ (NASDAQ: CRWS) inventory has increased by a significant 10% over the last three months. Since stock prices are usually in line with a company’s long-term financial performance, we decided to examine its financial indicators more closely to see if they had a hand in playing in the recent price step. In this article, we decided to focus on Crown Crafts’ BEET.
ROE or return on equity is a useful tool for assessing how effectively a company can generate return on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in terms of its shareholder investment.
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
So based on the above formula, ROE for Crown Crafts is:
18% = US $ 7.5m ÷ US $ 42m (Based on the subsequent twelve months to December 2020).
‘Return’ is the amount earned after tax in the last twelve months. So that means that for every $ 1 of the shareholder’s investment, the company generates a profit of $ 0.18.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE is a measure of a company’s profitability. Depending on how much of this profit the company reinvests or “retains” and how effectively it does so, we are then able to assess a company’s earnings growth potential. In general, companies with a high return on equity and profits, all other things being equal, have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Crown Crafts’ earnings growth and 18% ROE
To begin with, Crown Crafts’ ROE looks acceptable. When compared to the average industry ROE of 13%, the company’s ROE looks quite remarkable. Given the circumstances, we can not help but wonder why Crown Crafts has seen little or no growth over the last five years. Based on this, we feel that there may be other reasons that have not been discussed so far in this article that may hinder the growth of the company. These include low earnings retention or poor capital allocation.
We then compared Crown Crafts’ net income growth with the industry and found that the company’s growth rate is lower than the average industry growth of 3.0% over the same period, which is a bit worrying.
Earnings growth is an important measure to consider when evaluating a stock. The investor should try to determine if the expected growth or decline in earnings, as the case may be, is priced. By doing so, they will have an idea of whether the stock is heading out into clear blue waters, or if swampy waters await. A good indicator of expected earnings growth is the P / E ratio, which determines the price the market is willing to pay for a stock based on its earnings opportunities. So maybe you will check if Crown Crafts is trading at a high P / E or a low P / E, in relation to its industry.
Is Crown Crafts effectively investing its profits?
The high three-year median payout ratio of 56% (meaning the company retains only 44% of profits) for Crown Crafts suggests that the company’s earnings growth was small as a result of paying out a majority of its earnings.
In addition, Crown Crafts has paid dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth.
By and large, we feel that Crown Crafts has some positive qualities. While the company does have a high ROE, however, the number of earnings growth is quite disappointing. This may be because it reinvests only a small portion of its profits and pays the rest as dividends. That said, when we studied recent analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to decline, albeit marginally. Are the expectations of these analysts based on the broad expectations of the industry or on the fundamentals of the company? Click here to be taken to our analyst’s forecast page for the company.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not include the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in the mentioned stocks.
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