Are Poor Financial Prospects Dragging Down Cleanaway Waste Management Limited (ASX:CWY Stock?

With its stock down 3.8% over the past month, it is easy to disregard Cleanaway Waste Management (ASX:CWY). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on Cleanaway Waste Management's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Cleanaway Waste Management

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Cleanaway Waste Management is:

2.5% = AU$77m ÷ AU$3.0b (Based on the trailing twelve months to December 2022).

The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.03 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Cleanaway Waste Management's Earnings Growth And 2.5% ROE

As you can see, Cleanaway Waste Management's ROE looks pretty weak. Even when compared to the industry average of 6.7%, the ROE figure is pretty disappointing. Therefore, Cleanaway Waste Management's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Cleanaway Waste Management's net income growth with the industry and discovered that the company's growth is slightly less than the industry average growth of 0.4% in the same period.

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 CWY worth today? The intrinsic value infographic in our free research report helps visualize whether CWY is currently mispriced by the market.

Is Cleanaway Waste Management Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 75% (meaning, the company retains only 25% of profits) for Cleanaway Waste Management suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Cleanaway Waste Management has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings 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 71%. Regardless, the future ROE for Cleanaway Waste Management is predicted to rise to 7.8% despite there being not much change expected in its payout ratio.

Summary

In total, we would have a hard think before deciding on any investment action concerning Cleanaway Waste Management. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.