Centuria Capital Group (ASX:CNI) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Centuria Capital Group's (ASX:CNI) stock is up by a considerable 20% over the past month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Centuria Capital Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Centuria Capital Group

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Centuria Capital Group is:

7.5% = AU$106m ÷ AU$1.4b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.07.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Centuria Capital Group's Earnings Growth And 7.5% ROE

At first glance, Centuria Capital Group's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.7%. Even so, Centuria Capital Group has shown a fairly decent growth in its net income which grew at a rate of 9.2%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Centuria Capital Group's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Centuria Capital Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Centuria Capital Group Using Its Retained Earnings Effectively?

Centuria Capital Group seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 74%, meaning the company retains only 26% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Besides, Centuria Capital Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. 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 81%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 7.4%.

Conclusion

Overall, we have mixed feelings about Centuria Capital Group. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.