Will the market correct the stock price in the future?

With shares down 7.1% over the past three months, it’s easy to ignore Crown Crafts (NASDAQ:CRWS). But if you pay close attention, you might find that the key financial indicators look quite good, which could mean the stock could potentially rise in the long term, given how markets tend to reward more resilient long-term fundamentals. In this article we decided to focus on this Crown crafts’ ROE.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In other words, it shows how successful the company is in converting shareholder investments into profits.

Check out our latest analysis for Crown Crafts

How do you calculate return on equity?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for Crown Crafts is:

9.4% = US$4.6 million ÷ US$49 million (based on trailing twelve months to July 2023).

The ‘return’ is the annual profit. That means that for every $1 of equity, the company generated $0.09 in profit.

What is the relationship between ROE and earnings growth?

So far we’ve learned that ROE measures how efficiently a company generates its profits. Depending on how much of these profits the company reinvests or ‘retains’, and how effectively it does so, we can assess a company’s earnings growth potential. All other things being equal, companies with a high return on equity and profit retention tend to have a higher growth rate than companies that don’t share these characteristics.

Crown Crafts earnings growth and 9.4% ROE

At first glance, Crown Crafts’ ROE isn’t much to talk about. Next, compared to the average industry ROE of 16%, the company’s ROE leaves us even less enthusiastic. Although we can see that Crown Crafts has shown modest net profit growth of 9.8% over the past five years. We think that other factors may play a role here. Such as: high profit retention or efficient management.

The story continues

As a next step, we compared Crown Crafts’ net income growth with that of the industry. We were disappointed to see that the company’s growth is lower than the industry average growth of 14% over the same period.

Earnings growth is a big factor in stock valuations. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine whether the stock has a bright or bleak future. Has the market taken into account the future prospects for CRWS? You can discover it in our latest infographic research report on intrinsic value

Does Crown Crafts use retained earnings effectively?

Crown Crafts has a healthy combination of a moderate three-year average payout ratio of 41% (or a retention rate of 59%) and respectable earnings growth, as we saw above, meaning the company has been making efficient use of its profits.

Furthermore, Crown Crafts is committed to continuing to share its profits with shareholders, which we can see from its long history of paying dividends for at least a decade.

Resume

Overall, it seems like Crown Crafts has some positive aspects to its business. That is to say: decent profit growth, supported by a high rate of reinvestment. However, we believe that earnings growth could have been higher if the company had improved thanks to its low return on equity. Especially considering how the company reinvests a large portion of its profits. While we won’t dismiss the company entirely, we do want to try to determine how risky the company is so that we can make a more informed decision about the company. You can view the 3 risks we have identified for Crown Crafts by visiting our website risk dashboard free on our platform here.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.