Declining Stock and Solid Fundamentals: Is The Market Wrong About Caverion Oyj (HEL:CAV1V)?

Caverion Oyj (HEL:CAV1V) has had a rough three months with its share price down 12%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Caverion Oyj'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Caverion Oyj

How Do You Calculate Return On Equity?

Return on equity 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 Caverion Oyj is:

10% = €20m ÷ €192m (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.10 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. 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.

Caverion Oyj's Earnings Growth And 10% ROE

To start with, Caverion Oyj's ROE looks acceptable. Even when compared to the industry average of 11% the company's ROE looks quite decent. This certainly adds some context to Caverion Oyj's exceptional 46% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Caverion Oyj compares quite favourably to the industry average, which shows a decline of 10.0% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Caverion Oyj's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Caverion Oyj Making Efficient Use Of Its Profits?

Caverion Oyj has a three-year median payout ratio of 30% (where it is retaining 70% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Caverion Oyj is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Caverion Oyj has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 47% over the next three years. Still, forecasts suggest that Caverion Oyj's future ROE will rise to 27% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Summary

In total, we are pretty happy with Caverion Oyj's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.

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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