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


Centene (NYSE: CNC) has had a strong performance in the equity market with a significant 19% share increase in the past three months. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In particular, we will be paying close attention to Centene’s ROE today.

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. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

How is the ROE calculated?

Return on equity can be calculated using the formula:

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

So, based on the above formula, Centene’s ROE is:

2.7% = US $ 724 million ÷ US $ 27 billion (based on the last twelve months to September 2021).

The “return” is the annual profit. This means that for every dollar in shareholders’ equity, the company generated $ 0.03 in profit.

What does ROE have to do with profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of ​​the growth potential of the business. Assuming everything else 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.

Growth in Centene’s profits and 2.7% ROE

It’s pretty clear that Centene’s ROE is pretty low. Even compared to the industry average of 17%, the ROE figure is quite disappointing. Centene has nonetheless experienced a decent net income growth of 18% over the past five years. We think there might be other factors at play here. Such as – high profit retention or effective management in place.

We then performed a comparison between Centene’s net income growth with industry, which found that the company’s growth is similar to the industry’s average growth of 16% over the same period.

NYSE: CNC Past Profit Growth December 9, 2021

Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. Is Centene just valued over other companies? Those 3 valuation measures could help you decide.

Is Centene Efficiently Using Its Retained Earnings?

Centene does not pay any dividends, which means that all of its profits are reinvested in the business, which explains the good profit growth the company has experienced.

Conclusion

Overall, we think Centene has some positive attributes. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business undoubtedly contributed to the strong profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.

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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 any stock 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 any of the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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