C-Com Satellite Systems Inc.'s (CVE:CMI) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

By
Simply Wall St
Published
January 09, 2021

With its stock down 12% over the past three months, it is easy to disregard C-Com Satellite Systems (CVE:CMI). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on C-Com Satellite Systems' 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 C-Com Satellite Systems

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 C-Com Satellite Systems is:

9.6% = CA$2.1m ÷ CA$21m (Based on the trailing twelve months to August 2020).

The 'return' is the yearly profit. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

C-Com Satellite Systems' Earnings Growth And 9.6% ROE

At first glance, C-Com Satellite Systems seems to have a decent ROE. Even when compared to the industry average of 9.6% the company's ROE looks quite decent. This probably goes some way in explaining C-Com Satellite Systems' moderate 13% growth over the past five years amongst other factors.

We then compared C-Com Satellite Systems' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 6.0% in the same period.

TSXV:CMI Past Earnings Growth January 9th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if C-Com Satellite Systems is trading on a high P/E or a low P/E, relative to its industry.

Is C-Com Satellite Systems Efficiently Re-investing Its Profits?

C-Com Satellite Systems' high three-year median payout ratio of 109% suggests that the company is paying out more to its shareholders than what it is making. In spite of this, the company was able to grow its earnings respectably, as we saw above. That being said, the high payout ratio could be worth keeping an eye on in case the company is unable to keep up its current growth momentum. You can see the 5 risks we have identified for C-Com Satellite Systems by visiting our risks dashboard for free on our platform here.

Additionally, C-Com Satellite Systems has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we do feel that C-Com Satellite Systems has some positive attributes. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of C-Com Satellite Systems' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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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