Does the impressive performance of Centene Corporation (NYSE:CNC) shares have something to do with its fundamentals?

Centene (NYSE:CNC) stock is up 16% in the past three months. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . In particular, we’ll be paying attention to Centene’s ROE today.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest review for Centene

How do you calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Centene is:

4.9% = US$1.3 billion ÷ US$27 billion (based on trailing 12 months to December 2021).

The “return” is the annual profit. This therefore means that for every $1 of investment by its shareholder, the company generates a profit of $0.05.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Centene earnings growth and ROE of 4.9%

At first glance, Centene’s ROE does not look very promising. Then, compared to the industry average ROE of 18%, the company’s ROE leaves us even less excited. Centene was still able to see a decent net income growth of 15% over the past five years. Thus, the company’s earnings growth could likely have been caused by other variables. For example, the business has a low payout ratio or is efficiently managed.

Then, comparing Centene’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 15% over the same period.

NYSE: CNC Past Earnings Growth April 10, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Is Centene correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Centene make effective use of its retained earnings?

Since Centene does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.

Conclusion

Overall, we think Centene has positive attributes. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, looking at current analyst estimates, we have seen that the company’s earnings are expected to accelerate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Ian Crawford

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