Yahoo Finance Columbus McKinnon Corporation's (NASDAQ:CMCO) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?
Columbus McKinnon's (NASDAQ:CMCO) stock is up by a considerable 14% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Columbus McKinnon's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Columbus McKinnon
How To Calculate Return On Equity?
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 Columbus McKinnon is:
5.5% = US$49m ÷ US$878m (Based on the trailing twelve months to December 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 $0.06.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Columbus McKinnon's Earnings Growth And 5.5% ROE
At first glance, Columbus McKinnon's ROE doesn't look very promising. Next, when compared to the average industry ROE of 12%, the company's ROE leaves us feeling even less enthusiastic. As a result, Columbus McKinnon's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.
We then compared Columbus McKinnon's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.4% in the same 5-year period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is CMCO worth today? The intrinsic value infographic in our free research report helps visualize whether CMCO is currently mispriced by the market.
Is Columbus McKinnon Using Its Retained Earnings Effectively?
Columbus McKinnon has a low three-year median payout ratio of 17% (or a retention ratio of 83%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.
Additionally, Columbus McKinnon has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.
Summary
On the whole, we feel that the performance shown by Columbus McKinnon can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
