Columbus McKinnon (NASDAQ: CMCO) stock is up a whopping 16% in the past three months. We wonder if and what role the company’s financials play in this price change, as a company’s long-term fundamentals usually determine market results. In this article, we’ve decided to focus on Columbus McKinnons ROE.
Return on Equity, or ROE, is an important factor for a shareholder to consider as it indicates how effectively their capital is being reinvested. Put simply, it is used to evaluate a company’s profitability in relation to its equity.
Check out our latest analysis for Columbus McKinnon
How is the ROE calculated?
The ROE can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Columbus McKinnon is:
1.8% = $ 8.8 million ÷ $ 497 million (based on the last twelve months ended December 2020).
“Yield” refers to a company’s earnings over the past year. Another possibility is that for every $ 1 worth of equity, the company was able to make a profit of $ 0.02.
What does ROE have to do with earnings growth?
So far we have learned that ROE measures how efficiently a company generates its profits. Based on how much of its profits the company intends to reinvest or “keep”, we can then evaluate a company’s future ability to generate profits. When other things are alike, companies with high return on equity and retained earnings generally have a higher growth rate than companies that do not share these traits.
Columbus McKinnons earnings growth and 1.8% ROE
As you can see, the Columbus McKinnon ROE looks pretty weak. Even compared to the industry average of 12%, the ROE is pretty disappointing. However, we are pleasantly surprised to see that Columbus McKinnon has increased its net income by a significant 20% over the past five years. We believe there could be other aspects that positively affect the company’s earnings growth. For example, it is possible that the company’s management made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Columbus McKinnon’s net income growth with that of the industry and we were pleased to find that the company’s growth was higher than the average industry growth of 8.0%.
NasdaqGS: Past CMCO Earnings Growth May 17, 2021
Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know if the market has priced in the company’s expected earnings growth (or decline). That way, they can determine if the future of the stock is promising or threatening. Is CMCO fairly valued? These Infographic on the intrinsic value of the company has everything you need to know
Is Columbus McKinnon using its retained earnings effectively?
Columbus McKinnon’s average three-year payout to shareholders is 15%, which is pretty low. This means that the company keeps 85% of its profits. So it appears that management is heavily reinvesting profits to grow their business and this is reflected in their earnings growth number.
In addition, Columbus McKinnon paid dividends over a seven-year period. This shows that the company has an obligation to share profits with its shareholders.
Summary
Overall, we feel that Columbus McKinnon has some positive qualities. With a high rate of reinvestment, albeit a low ROE, the company has seen significant earnings growth. However, looking at the latest analyst estimates, we’ve determined that the company’s earnings are likely to gain momentum. Are these analyst expectations based on broad industry expectations or company fundamentals? Click here to go to our analyst’s forecast page for the company.
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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