Cairn Homes plc's (LON:CRN) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Cairn Homes' (LON:CRN) stock increased significantly by 13% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Cairn Homes' ROE today.

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.

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How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Cairn Homes is:

15% = €115m ÷ €758m (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.15 in profit.

View our latest analysis for Cairn Homes

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. 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.

Cairn Homes' Earnings Growth And 15% ROE

At first glance, Cairn Homes seems to have a decent ROE. On comparing with the average industry ROE of 5.6% the company's ROE looks pretty remarkable. This certainly adds some context to Cairn Homes' exceptional 31% net income growth seen over the past five years. However, there could also be other causes 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 Cairn Homes compares quite favourably to the industry average, which shows a decline of 3.2% over the last few years.

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. Has the market priced in the future outlook for CRN? You can find out in our latest intrinsic value infographic research report.

Is Cairn Homes Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 53% (implying that it keeps only 47% of profits) for Cairn Homes suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Cairn Homes is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 45% of its profits over the next three years. As a result, Cairn Homes' ROE is not expected to change by much either, which we inferred from the analyst estimate of 17% for future ROE.

Conclusion

In total, we are pretty happy with Cairn Homes' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.