Could Fundamentals Be Driving The Momentum?

Christel Deskins

Most readers would already be aware that Cleanaway Waste Management’s (ASX:CWY) stock increased significantly by 18% over the past three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had […]

Most readers would already be aware that Cleanaway Waste Management’s (ASX:CWY) stock increased significantly by 18% over the past three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Cleanaway Waste Management’s ROE.

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 Cleanaway Waste Management

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 Cleanaway Waste Management is:

4.2% = AU$108m ÷ AU$2.5b (Based on the trailing twelve months to December 2019).

The ‘return’ is the amount earned after tax over the last twelve months. That means that for every A$1 worth of shareholders’ equity, the company generated A$0.04 in profit.

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. 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. 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.

Cleanaway Waste Management’s Earnings Growth And 4.2% ROE

As you can see, Cleanaway Waste Management’s ROE looks pretty weak. Even compared to the average industry ROE of 12%, the company’s ROE is quite dismal. Despite this, surprisingly, Cleanaway Waste Management saw an exceptional 53% net income growth over the past five years. Therefore, there could be other reasons 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.

We then compared Cleanaway Waste Management’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 28% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Cleanaway Waste Management is trading on a high P/E or a low P/E, relative to its industry.

Is Cleanaway Waste Management Efficiently Re-investing Its Profits?

Cleanaway Waste Management’s significant three-year median payout ratio of 52% (where it is retaining only 48% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Moreover, Cleanaway Waste Management is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 51%. However, Cleanaway Waste Management’s ROE is predicted to rise to 6.9% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we do feel that Cleanaway Waste Management has some positive attributes. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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 [email protected]

Source Article

Next Post

Musician starts non-profit to fund New Orleans' artists during the pandemic after losing his father to the virus

Delfeayo Marsalis’ father, Ellis Marsalis Jr., was a jazz icon in New Orleans, as well as the patriarch of the Marsalis family. After 85 years of bringing jazz to his community, the elder Marsalis died of complications from Covid-19. The day after his death, a local music store put out […]