Stock Analysis

Is CorVel Corporation's (NASDAQ:CRVL) Latest Stock Performance A Reflection Of Its Financial Health?

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NasdaqGS:CRVL
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Most readers would already be aware that CorVel's (NASDAQ:CRVL) stock increased significantly by 18% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study CorVel's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for CorVel

How Is ROE Calculated?

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 CorVel is:

20% = US$41m ÷ US$202m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.20 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

CorVel's Earnings Growth And 20% ROE

At first glance, CorVel seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 12%. This certainly adds some context to CorVel's decent 13% net income growth seen over the past five years.

As a next step, we compared CorVel's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.0%.

past-earnings-growth
NasdaqGS:CRVL Past Earnings Growth January 12th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about CorVel's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CorVel Using Its Retained Earnings Effectively?

Summary

On the whole, we feel that CorVel's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard will have the 1 risk we have identified for CorVel.

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About NasdaqGS:CRVL

CorVel

CorVel Corporation provides workers’ compensation, auto, liability, and health solutions for employers, third party administrators, insurance companies, and government agencies to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims.

Flawless balance sheet with proven track record.