CRH (ISE: CRG) shares are up 9.9% over the past month. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. In this article, we have decided to focus on the ROE of CRH.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.
Discover our latest analysis for CRH
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for CRH is:
7.8% = US $ 1.6 billion Ã· US $ 20 billion (based on the last twelve months to June 2021).
The “return” is the income the business has earned over the past year. One way to conceptualize this is that for every $ 1 in share capital it has, the company has made $ 0.08 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or âwithholdsâ and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics. .
A side-by-side comparison of CRH earnings growth and 7.8% ROE
At first glance, CRH’s ROE does not look very promising. We then compared the company’s ROE to that of the industry as a whole and were disappointed to find that the ROE is 11% below the industry average. As a result, the stable growth of CRH’s net income over the past five years is not surprising given its lower ROE.
Then, comparing with the growth in net income of the industry, we found that the reported growth of CRH was lower than the industry growth of 9.3% during the same period, which did not is not something we like to see.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he’ll have an idea if the action is heading for clear blue waters or swampy waters ahead. A 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 outlook. So, you might want to check if CRH is trading high P / E or low P / E, relative to its industry.
Does CRH effectively reinvest its profits?
Despite a moderate three-year median payout ratio of 46% (meaning the company retains 54% of profits) over the past three years, CRH’s earnings growth has been more or less stable. Therefore, there could be other reasons for the lack in this regard. For example, the business could be in decline.
In addition, CRH pays dividends over a period of at least ten years, which suggests that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. . Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 37%. Still, forecasts suggest that CRH’s future ROE will reach 12% even though the company’s payout ratio is unlikely to change much.
Overall, we believe that the performance shown by CRH can be open to many interpretations. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. However, the latest analyst forecasts show that the company will continue to see its profits increase. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.