Stock Analysis

Has CLPS Incorporation's (NASDAQ:CLPS) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

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NasdaqGM:CLPS
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CLPS Incorporation's (NASDAQ:CLPS) stock is up by a considerable 7.2% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to CLPS Incorporation's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for CLPS Incorporation

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for CLPS Incorporation is:

11% = US$3.1m ÷ US$29m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

CLPS Incorporation's Earnings Growth And 11% ROE

To begin with, CLPS Incorporation seems to have a respectable ROE. Even so, when compared with the average industry ROE of 14%, we aren't very excited. Moreover, CLPS Incorporation's net income shrunk at a rate of 30%over the past five years. Bear in mind, the company does have a high ROE. It is just that the industry ROE is higher. Hence there might be some other aspects that are causing earnings to shrink. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

However, when we compared CLPS Incorporation's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 12% in the same period. This is quite worrisome.

past-earnings-growth
NasdaqGM:CLPS Past Earnings Growth January 12th 2021

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. If you're wondering about CLPS Incorporation's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CLPS Incorporation Using Its Retained Earnings Effectively?

Conclusion

On the whole, we do feel that CLPS Incorporation has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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 4 risks we have identified for CLPS Incorporation.

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