Is CorVel Corporation's (NASDAQ:CRVL) Latest Stock Performance Being Led By Its Strong Fundamentals?

By
Simply Wall St
Published
April 13, 2021
NasdaqGS:CRVL

CorVel's (NASDAQ:CRVL) stock up by 3.7% over the past week. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study CorVel's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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?

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 CorVel is:

21% = US$43m ÷ US$210m (Based on the trailing twelve months to December 2020).

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 $0.21 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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of CorVel's Earnings Growth And 21% ROE

To start with, CorVel's ROE looks acceptable. On comparing with the average industry ROE of 16% the company's ROE looks pretty remarkable. Probably as a result of this, CorVel was able to see a decent growth of 12% over the last five years.

Next, on comparing CorVel's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% in the same period.

past-earnings-growth
NasdaqGS:CRVL Past Earnings Growth April 13th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if CorVel is trading on a high P/E or a low P/E, relative to its industry.

Is CorVel Efficiently Re-investing Its Profits?

Conclusion

On the whole, we feel that CorVel'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. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 1 risk we have identified for CorVel visit our risks dashboard for free.

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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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