Carel Industries S.p.A.'s (BIT:CRL) Stock Been Rising: Are Strong Financials Guiding The Market?

Most readers would already know that Carel Industries' (BIT:CRL) stock increased by 9.6% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Carel Industries' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Carel Industries

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 Carel Industries is:

13% = €53m ÷ €414m (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Carel Industries' Earnings Growth And 13% ROE

To begin with, Carel Industries seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 13%. This probably goes some way in explaining Carel Industries' moderate 15% growth over the past five years amongst other factors.

Next, on comparing Carel Industries' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 18% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Carel Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Carel Industries Using Its Retained Earnings Effectively?

Carel Industries has a healthy combination of a moderate three-year median payout ratio of 27% (or a retention ratio of 73%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Carel Industries is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 32%. As a result, Carel Industries' ROE is not expected to change by much either, which we inferred from the analyst estimate of 15% for future ROE.

Summary

Overall, we are quite pleased with Carel Industries' 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.