Clarus Corporation (NASDAQ: CLAR) stock recently showed weakness, but the financial outlook looks correct: is the market wrong?
It’s hard to get excited after looking at the recent performance of Clarus (NASDAQ: CLAR), as its stock has fallen 6.1% in the past week. However, stock prices are usually determined by a company’s long-term financial data, which in this case looks pretty respectable. In this article, we have decided to focus on the ROE of Clarus.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Check out our latest review for Clarus
How do you calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Clarus is:
7.3% = US $ 16 million ÷ US $ 215 million (based on the last twelve months to June 2021).
“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.07 in profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess the profits that the business is reinvesting or “withholding” 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.
A side-by-side comparison of Clarus’ profit growth and 7.3% ROE
At first glance, Clarus’ ROE does not look very promising. Then, compared to the industry average ROE of 31%, the company’s ROE leaves us even less enthusiastic. Despite this, Clarus has been able to significantly increase its bottom line, at a rate of 75% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. Such as – high profit retention or effective management in place.
We then compared the growth of Clarus’ net income with the industry and we are happy to see that the growth number of the company is higher compared to the industry which has a growth rate of 7.5%. during the same period.
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Is CLAR correctly valued? This intrinsic business value infographic has everything you need to know.
Is Clarus using its retained earnings efficiently?
Clarus’ three-year median payout ratio to shareholders is 18%, which is quite low. This implies that the company keeps 82% of its profits. This suggests that management is reinvesting most of the profits to grow the business, as evidenced by the growth seen by the business.
In addition, Clarus paid dividends over a period of three years. This shows that the company is committed to sharing the profits with its shareholders. Our latest analyst data shows the company’s future payout ratio is expected to drop to 5.2% over the next three years. As a result, the expected drop in the payout ratio of Clarus explains the expected increase in the company’s future ROE to 13%, over the same period.
Overall, we think Clarus has some positive attributes. With a high reinvestment rate, but a low ROE, the company has managed to see considerable growth in profits. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. 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.
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 any of the stocks mentioned.
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