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Clearwater Paper Corporation's (NYSE:CLW) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?
Clearwater Paper (NYSE:CLW) has had a rough three months with its share price down 14%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Clearwater Paper's ROE today.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Clearwater Paper
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 Clearwater Paper is:
8.0% = US$46m ÷ US$572m (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.08 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. 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 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.
Clearwater Paper's Earnings Growth And 8.0% ROE
On the face of it, Clearwater Paper's ROE is not much to talk about. Next, when compared to the average industry ROE of 29%, the company's ROE leaves us feeling even less enthusiastic. Clearwater Paper was still able to see a decent net income growth of 5.6% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Clearwater Paper's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 22% in the same period, which is a bit concerning.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Clearwater Paper fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Clearwater Paper Using Its Retained Earnings Effectively?
Clearwater Paper doesn't pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.
Conclusion
In total, it does look like Clearwater Paper has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Clearwater Paper.
What are the risks and opportunities for Clearwater Paper?
Clearwater Paper Corporation manufactures and supplies bleached paperboards, and consumer and parent roll tissues in the United States and internationally.
Rewards
Price-To-Earnings ratio (12.1x) is below the US market (13.8x)
Became profitable this year
Risks
Significant insider selling over the past 3 months
Has a high level of debt
Further research on
Clearwater Paper
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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.
About NYSE:CLW
Clearwater Paper
Clearwater Paper Corporation manufactures and supplies bleached paperboards, and consumer and parent roll tissues in the United States and internationally.
Adequate balance sheet with acceptable track record.
