Is Cohort plc’s (LON:CHRT) Latest Stock Performance A Reflection Of Its Financial Health?
Cohort (LON:CHRT) stock is up a whopping 10% over the past three months. Given that the market rewards strong financials over the long term, we wonder if that is the case in this case. Specifically, in this article, we decided to examine the cohort ROE.
Return on Equity, or ROE, is an important metric for evaluating how efficiently management is using the company’s capital. Put simply, it measures a company’s profitability relative to its equity.
Check out our latest analysis for Cohort
How do you calculate return on equity?
The return on equity can be calculated using the formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
Based on the formula above, the ROE for the cohort is:
11% = £11m ÷ £100m (based on trailing 12 months to April 2023).
“Yield” refers to a company’s earnings over the past year. This means that for every £1 of equity the company made £0.11 of profit.
How is ROE related to earnings growth?
So far we’ve learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else being equal, companies that have both a higher return on equity and higher earnings retention tend to be those that have a higher growth rate compared to companies that don’t share the same characteristics.
A side-by-side comparison of cohort revenue growth and 11% ROE
At first glance, Cohort appears to have a decent ROE. And comparing to the industry, we found that the average industry ROE is similar at 11%. This certainly adds some context to Cohort’s modest net income growth of 9.5% over the last five years.
As a next step, we compared Cohort’s net income growth to that of the industry and were pleased to find that the company’s growth is faster than the average industry growth of 5.7%.
The basis for a company’s appreciation depends to a large extent on earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This will give them an idea of whether the stock is headed for clear blue waters or if swampy waters await them. Is Cohort fairly valued compared to other companies? These 3 evaluation criteria could help you with the decision.
Does Cohort reinvest its profits efficiently?
Cohort boasts a significant three-year median payout ratio of 60%, which means he’s left with just 40% to reinvest in his company. This means the company has been able to deliver decent earnings growth despite returning the majority of its profits to shareholders.
Also, Cohort has been paying dividends for at least a decade. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 41% over the next three years. The fact that the company’s ROE is expected to increase to 14% over the same period can be explained by the lower payout ratio.
Diploma
Overall, we’re quite happy with Cohort’s performance. Above all, the high ROE has contributed to the impressive earnings growth. Although the company only reinvested a small portion of its profits, it has still managed to significantly increase its profits. However, as projected by the latest analyst estimates, the company’s earnings growth is likely to slow. To learn more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts solely using 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 goals or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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