Stock Analysis

Is Celestica Inc.'s (TSE:CLS) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

TSX:CLS
Source: Shutterstock

Most readers would already be aware that Celestica's (TSE:CLS) stock increased significantly by 59% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Celestica's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Celestica

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 Celestica is:

14% = US$245m ÷ US$1.8b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.14.

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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Celestica's Earnings Growth And 14% ROE

To begin with, Celestica seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. Consequently, this likely laid the ground for the decent growth of 18% seen over the past five years by Celestica.

We then performed a comparison between Celestica's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 18% in the same 5-year period.

past-earnings-growth
TSX:CLS Past Earnings Growth April 16th 2024

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Celestica fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Celestica Using Its Retained Earnings Effectively?

Given that Celestica doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with Celestica's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Valuation is complex, but we're helping make it simple.

Find out whether Celestica is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.