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Does CanWel Building Materials Group Ltd.'s (TSE:CWX) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Simply Wall St
·4 min read

CanWel Building Materials Group (TSE:CWX) has had a great run on the share market with its stock up by a significant 58% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Particularly, we will be paying attention to CanWel Building Materials Group's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for CanWel Building Materials Group

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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So, based on the above formula, the ROE for CanWel Building Materials Group is:

7.2% = CA$23m ÷ CA$326m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

CanWel Building Materials Group's Earnings Growth And 7.2% ROE

When you first look at it, CanWel Building Materials Group's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 10%. As a result, CanWel Building Materials Group's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

We then compared CanWel Building Materials Group's net income growth with the industry and found that the average industry growth rate was 14% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is CWX fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is CanWel Building Materials Group Efficiently Re-investing Its Profits?

CanWel Building Materials Group has a very high three-year median payout ratio of 145% over the last last three years, which suggests that the company is dipping into more than just its earnings to pay its dividend. This does go some way in explaining the negligible earnings growth seen by CanWel Building Materials Group. Paying a dividend beyond their means is usually not viable over the long term. This is indicative of risk. To know the 3 risks we have identified for CanWel Building Materials Group visit our risks dashboard for free.

In addition, CanWel Building Materials Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we would be extremely cautious before making any decision on CanWel Building Materials Group. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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.

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