Is Chesapeake Utilities Corporation's (NYSE:CPK) Stock's Recent Performance A Reflection Of Its Financial Health?

By
Simply Wall St
Published
July 31, 2021
NYSE:CPK
Source: Shutterstock

Chesapeake Utilities' (NYSE:CPK) stock is up by 5.1% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Chesapeake Utilities' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Chesapeake Utilities

How To Calculate Return On Equity?

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 Chesapeake Utilities is:

10% = US$76m ÷ US$726m (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. 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?

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 Chesapeake Utilities' Earnings Growth And 10% ROE

To begin with, Chesapeake Utilities seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 10%. This certainly adds some context to Chesapeake Utilities' moderate 11% net income growth seen over the past five years.

We then performed a comparison between Chesapeake Utilities' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.4% in the same period.

past-earnings-growth
NYSE:CPK Past Earnings Growth July 31st 2021

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Chesapeake Utilities fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chesapeake Utilities Making Efficient Use Of Its Profits?

Chesapeake Utilities has a three-year median payout ratio of 41%, which implies that it retains the remaining 59% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Chesapeake Utilities has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 41%. Accordingly, forecasts suggest that Chesapeake Utilities' future ROE will be 12% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Chesapeake Utilities' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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