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Declining Stock and Solid Fundamentals: Is The Market Wrong About CRA International, Inc. (NASDAQ:CRAI)?

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It is hard to get excited after looking at CRA International's (NASDAQ:CRAI) recent performance, when its stock has declined 7.3% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study CRA International'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for CRA International

How Is ROE Calculated?

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 CRA International is:

20% = US$43m ÷ US$209m (Based on the trailing twelve months to April 2022).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.20.

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. 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.

CRA International's Earnings Growth And 20% ROE

To begin with, CRA International seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 17%. This certainly adds some context to CRA International's exceptional 27% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that CRA International's growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

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. Doing so will help them establish if the stock's future looks promising or ominous. Is CRA International fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is CRA International Using Its Retained Earnings Effectively?

The three-year median payout ratio for CRA International is 29%, which is moderately low. The company is retaining the remaining 71%. By the looks of it, the dividend is well covered and CRA International is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, CRA International has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with CRA International'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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