Is Clarkson PLC’s (LON:CKN) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Clarkson (LON:CKN) has had a great run on the share market with its stock up by a significant 12% over the last three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Clarkson’s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Clarkson

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

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

15% = UK£54m ÷ UK£362m (Based on the trailing twelve months to December 2021).

The ‘return’ is the amount earned after tax over the last twelve months. That means that for every £1 worth of shareholders’ equity, the company generated £0.15 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

Clarkson’s Earnings Growth And 15% ROE

At first glance, Clarkson seems to have a decent ROE. And on comparing with the industry, we found that the average industry ROE is similar at 16%. However, while Clarkson has a pretty respectable ROE, its five year net income decline rate was 39%. So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

So, as a next step, we compared Clarkson’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 25% in the same period.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is CKN worth today? The intrinsic value infographic in our free research report helps visualize whether CKN is currently mispriced by the market.

Is Clarkson Using Its Retained Earnings Effectively?

With a high LTM (or last twelve month) payout ratio of 51% (implying that 49% of the profits are retained), most of Clarkson’s profits are being paid to shareholders, which explains the company’s shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 2 risks we have identified for Clarkson.

In addition, Clarkson has been paying dividends over a period of at least ten years, suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 56%. Still, forecasts suggest that Clarkson’s future ROE will drop to 12% even though the company’s payout ratio is not expected to change by much.

Conclusion

Overall, we feel that Clarkson certainly does have some positive factors to consider. However, while the company does have a high ROE, its growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. With that said, we currently studied analyst estimates and discovered that analysts expect the company’s earnings growth to improve slightly. Sure enough, this could bring some relief to shareholders. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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