Should shareholders prepare for a stock price correction?

The Cedar Woods Properties (ASX:CWP) share price has increased by 8.6% over the past three months. However, we are a bit doubtful whether this trend will continue given the weak financial performance indicators. Specifically, we decided to examine Cedar Woods Properties’ ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. Simply put, it is used to evaluate a company’s profitability compared to its equity.

See our latest analysis for Cedar Woods real estate.

How do I calculate return on equity?

of Formula for calculating return on equity teeth:

Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity

So, based on the above formula, Cedar Woods Properties’ ROE is:

7.3% = AUD 32 million ÷ AUD 431 million (based on the trailing twelve months to June 2023).

“Return” is the annual profit. Another way to think of it is that for every A$1 worth of shares, the company was able to earn him A$0.07 in profit.

What is the relationship between ROE and profit growth rate?

So far, we have learned that ROE is a measure of a company’s profitability. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company’s growth potential. Generally speaking, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.

A side-by-side comparison of Cedar Woods Properties’ earnings growth and 7.3% ROE.

When you first look at it, Cedar Woods Properties’ ROE doesn’t look very attractive. However, ROE is on par with the industry average of 7.3%, so we can’t completely rule it out. But once again, his five-year net income for Cedar Woods Properties decreased at a rate of his 13%. Don’t forget that the company’s ROE is a bit low to begin with. That may be causing the profit growth rate to shrink.

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However, when we compared Cedar Woods Properties’ growth with the industry, we found that while the company’s revenues have been shrinking, the industry has seen its revenues grow at 12% over the same period. This is very worrying.

Earnings growth is an important metric to consider when evaluating a stock. Investors should check whether expected earnings growth or decline has been factored in in any case. By doing so, you can find out if the stock is headed for clear blue waters or if a swamp awaits. If you’re curious about Cedar Woods Properties’s valuation, check out this gauge of its price-to-earnings ratio compared to its industry.

Is Cedar Woods Properties using its profits efficiently?

Cedar Woods Properties has a high three-year median payout ratio of 65%, meaning it retains 35% of its profits. This suggests that the company pays out most of its profits to shareholders as dividends. This goes some way to explaining why the company’s profits are shrinking. The business is left with only a small amount of capital that can be reinvested. This is a vicious cycle that does not benefit the company in the long run. The risks dashboard should now display the two risks you have identified for Cedar Woods Properties.

Furthermore, Cedar Woods Properties has been paying dividends for at least 10 years, suggesting that management must have known that shareholders wanted dividends more than profit growth. We checked the latest analyst consensus data and found that the company is expected to continue paying out around 55% of its profit over the next three years. Still, predictions show that Cedar Woods Properties’ future ROE will rise to 9.9%, even though the company’s dividend payout ratio is not expected to change much.

conclusion

Overall, I would be very cautious before making a decision about Cedar Woods Properties. Given that the company doesn’t reinvest much into its business and has a low ROE, it would be no surprise if it doesn’t or won’t grow its earnings. Having said that, we researched the latest analyst forecasts and found that while the company has seen its earnings shrink in the past, analysts expect future earnings to grow. If you want to know the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and the articles are not intended as financial advice. This 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 long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.