News
Is the strong financial outlook the force driving the momentum in Costain Group PLC shares LON:COST)?
Costain Group (LON:COST) shares are up a considerable 21% in the last three months. Given that the market rewards strong financials over the long term, we wonder if that will be the case in this case. In this article, we decided to focus on Costain Group ROE.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. Put another way, it reveals the company’s success in transforming shareholder investments into profits.
See our latest analysis for Costain Group
How to calculate return on equity?
ROE can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, Costain Group’s ROE is:
10% = £22m ÷ £219m (Based on trailing twelve months to December 2023).
The ‘return’ is the revenue the company made in the last year. One way to conceptualize this is that for every £1 of shareholders’ capital it has, the company made £0.10 of profit.
What does ROE have to do with earnings growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company’s growth potential. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
Costain Group profit growth and ROE of 10%
At first glance, Costain Group appears to have a decent ROE. Even when compared to the industry average of 11%, the company’s ROE looks pretty decent. This certainly adds some context to the Costain Group’s exceptional 20% net profit growth seen over the last five years. We think there could also be other factors at play here. For example, it’s possible that the company’s management has made some good strategic decisions or that the company has a low payout ratio.
As a next step, we compared Costain Group’s net profit growth to that of the industry and, fortunately, we found that the growth seen by the company is higher than the industry average growth of 11%.
past profit growth
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea of whether the stock is headed for clear blue waters or if swampy waters await. Has the market priced in the future prospects for COST? You can find out at our latest intrinsic value infographic research report.
The story continues
Is Costain Group reinvesting its profits efficiently?
The Costain Group has a really low three-year average payout ratio of 7.5%, meaning it has the remaining 92% to reinvest in its business. This suggests that management is reinvesting the majority of profits to grow the business, as evidenced by the growth seen by the company.
Furthermore, the Costain Group has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with shareholders. By studying the latest analyst consensus data, we found that the company’s future payout ratio is expected to increase to 11% over the next three years. However, the company’s ROE is not expected to change much despite the higher expected payout ratio.
Conclusion
Overall, we are very satisfied with the Costain Group’s performance. Specifically, we like that the company is reinvesting a large portion of its profits at a high rate of return. Of course, this caused the company to record substantial growth in its profits. The latest forecasts from industry analysts show that the company is expected to maintain its current growth rate. Are these analysts’ expectations based on general expectations for the industry or on the company’s fundamentals? Click here to be directed to our analysts’ forecast page for the company.
Do you have feedback on this article? Worried about the content? Get in touch with us directly. Alternatively, email the editorial team (at) Simplywallst.com.
This Simply Wall St article 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 to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.