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Most readers would already be aware that Clean Seed Capital Group's (CVE:CSX) stock increased significantly by 12% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Clean Seed Capital Group's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Is ROE Calculated?
Return on equity 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 Clean Seed Capital Group is:
25% = CA$2.4m ÷ CA$9.3m (Based on the trailing twelve months to March 2021).
The 'return' refers to a company's earnings over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.25 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Clean Seed Capital Group's Earnings Growth And 25% ROE
Firstly, we acknowledge that Clean Seed Capital Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 5.7% also doesn't go unnoticed by us. This likely paved the way for the modest 9.6% net income growth seen by Clean Seed Capital Group over the past five years. growth
We then performed a comparison between Clean Seed Capital Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.5% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is CSX worth today? The intrinsic value infographic in our free research report helps visualize whether CSX is currently mispriced by the market.
Is Clean Seed Capital Group Making Efficient Use Of Its Profits?
Overall, we are quite pleased with Clean Seed Capital Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 3 risks we have identified for Clean Seed Capital Group visit our risks dashboard for free.
This article by Simply Wall St is general in nature. 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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