Crown Crafts’ (NASDAQ:CRWS) stock up by 8.3% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Crown Crafts’ ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Crown Crafts
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Crown Crafts is:
15% = US$7.3m ÷ US$49m (Based on the trailing twelve months to January 2023).
The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.15.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity 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.
Crown Crafts’ Earnings Growth And 15% ROE
At first glance, Crown Crafts seems to have a decent ROE. Yet, the fact that the company’s ROE is lower than the industry average of 21% does temper our expectations. However, the moderate 18% net income growth seen by Crown Crafts over the past five years is definitely a positive. Therefore, the growth in earnings could probably have been caused by other variables. Such as – high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also provides some context to the earnings growth seen by the company.
As a next step, we compared Crown Crafts’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Is Crown Crafts fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Crown Crafts Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 39% (implying that the company retains 61% of its profits), it seems that Crown Crafts is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
Moreover, Crown Crafts is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Overall, we are quite pleased with Crown Crafts’ performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 2 risks we have identified for Crown Crafts.
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This article by Simply Wall St is 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 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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