Are Core-Mark Holding Company, Inc.'s (NASDAQ:CORE) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 8.5% over the past month, it is easy to disregard Core-Mark Holding Company (NASDAQ:CORE). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Core-Mark Holding Company'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Core-Mark Holding Company

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 Core-Mark Holding Company is:

9.8% = US$60m ÷ US$619m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Core-Mark Holding Company's Earnings Growth And 9.8% ROE

When you first look at it, Core-Mark Holding Company's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 31% either. As a result, Core-Mark Holding Company reported a very low income growth of 3.2% over the past five years.

Next, on comparing with the industry net income growth, we found that Core-Mark Holding Company's reported growth was lower than the industry growth of 15% in the same period, which is not something we like to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is CORE fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Core-Mark Holding Company Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 40% (implying that the company retains the remaining 60% of its income), Core-Mark Holding Company's earnings growth was quite low. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Core-Mark Holding Company has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 25% over the next three years. As a result, the expected drop in Core-Mark Holding Company's payout ratio explains the anticipated rise in the company's future ROE to 13%, over the same period.

Conclusion

In total, we're a bit ambivalent about Core-Mark Holding Company's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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