Are Strong Financial Prospects The Force That Is Driving The Momentum In Cerillion Plc's LON:CER) Stock?

By
Simply Wall St
Published
March 21, 2022
AIM:CER
Source: Shutterstock

Cerillion (LON:CER) has had a great run on the share market with its stock up by a significant 13% over the last week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Cerillion's 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Cerillion

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Cerillion is:

32% = UK£6.4m ÷ UK£20m (Based on the trailing twelve months to September 2021).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.32 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Cerillion's Earnings Growth And 32% ROE

Firstly, we acknowledge that Cerillion has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 8.9% which is quite remarkable. So, the substantial 32% net income growth seen by Cerillion over the past five years isn't overly surprising.

We then compared Cerillion's 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 13% in the same period.

past-earnings-growth
AIM:CER Past Earnings Growth March 21st 2022

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is CER worth today? The intrinsic value infographic in our free research report helps visualize whether CER is currently mispriced by the market.

Is Cerillion Efficiently Re-investing Its Profits?

Cerillion has a three-year median payout ratio of 48% (where it is retaining 52% of its income) which is not too low or not too high. So it seems that Cerillion is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Cerillion is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 27% over the next three years.

Summary

On the whole, we feel that Cerillion's performance has been quite good. 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.

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