With its stock down 6. 4% over the past month, it is easy to disregard Canlan Ice Sports (TSE: ICE). 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 Canlan Ice Sports’ ROE.
ROE or return on equity is an useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Canlan Ice Sports
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Collateral = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So , based on the above formula, the ROE for Canlan Ice Sports is:
11% = CA$4. 8m ÷ CA$45m (Based on the trailing twelve months to September 2022).
The ‘return’ is the yearly profit. So , this means that for every CA$1 of its shareholder’s investments, the company generates a profit of CA$0. 11.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these earnings the company reinvests or “retains”, and how effectively it does so , we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on collateral and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Canlan Ice Sports’ Earnings Growth Plus 11% ROE
To begin with, Canlan Ice Sports seems to have a respectable ROE. And on comparing with the industry, we found that the average industry ROE is similar at 13%. As you might expect, the 29% net income decline reported by Canlan Ice Sports is a bit of the surprise. Based on this, all of us feel that there might be other reasons which haven’t been discussed so far in this article that could be hampering the company’s growth. These include low earnings retention or poor allocation of capital.
Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 2 . 4% in the same period, we found that Canlan Ice Sports’ performance is pretty disappointing, as it suggests that the organization has been shrunk its income at a rate faster than the business.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected revenue growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Canlan Ice Sports”s valuation, check out this gauge of its price-to-earnings ratio , as compared to its industry.
Is Canlan Snow Sports Using Its Retained Earnings Effectively?
Canlan Ice Sports’ low LTM (or last twelve month) payout ratio of 8. 3% (implying that it retains the remaining 92% of its profits) comes as a surprise when you pair it with the shrinking profits. This typically shouldn’t be the case when a company is retaining most of its earnings. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.
Moreover, Canlan Ice Sports has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings development.
Overall, we feel that Canlan Ice Sports certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in cash flow even in spite of a high ROE and a higher reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 5 risks we have identified for Canlan Ice Sports visit our risks dashboard for free.
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This article by Simply Wall St will be 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 even 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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