Is Cerillion PLC's (LON:CER) Latest Stock Performance A Reflection Of Its Financial Health?

Cerillion (LON:CER) has had a great run on the share market with its stock up by a significant 13% over the last month. 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. In this article, we decided to focus on Cerillion'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.

Check out our latest analysis for Cerillion

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 Cerillion is:

27% = UK£4.2m ÷ UK£15m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.27 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. 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.

A Side By Side comparison of Cerillion's Earnings Growth And 27% ROE

First thing first, we like that Cerillion has an impressive ROE. Secondly, even when compared to the industry average of 8.7% the company's ROE is quite impressive. This likely paved the way for the modest 19% net income growth seen by Cerillion over the past five years. growth

Next, on comparing with the industry net income growth, we found that Cerillion's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Cerillion fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Cerillion Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 69% (or a retention ratio of 31%) for Cerillion suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Cerillion has paid dividends over a period of five 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 drop to 50% over the next three years.

Conclusion

In total, we are pretty happy with Cerillion's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Cerillion's 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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