Are strong financials behind the recent rally in Corero Network Security plc (LON:CNS) shares?
Most readers will already know that shares of Corero Network Security (LON:CNS) have risen a significant 11% over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In particular, we will pay attention to the ROE of Corero Network Security today.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest analysis for Corero Network Security
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Corero Network Security is:
17% = $2.4 million ÷ $15 million (based on trailing 12 months to June 2022).
“Yield” is the income the business has earned over the past year. This therefore means that for every pound invested by its shareholder, the company generates a profit of 0.17 pounds.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Earnings growth and ROE of 17% from Corero Network Security
For starters, Corero Network Security’s ROE seems acceptable. Especially when compared to the industry average of 8.8%, the company’s ROE looks quite impressive. Probably because of this, Corero Network Security has been able to see an impressive net income growth of 47% over the past five years. We believe that there could also be other aspects that positively influence the company’s earnings growth. For example, the business has a low payout ratio or is efficiently managed.
Then, comparing with the growth in net revenue for the industry, we found that Corero Network Security’s growth is quite high compared to the average industry growth of 12% over the same period, which is great to see .
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. Is Corero Network Security valued enough compared to other companies? These 3 assessment metrics might help you decide.
Does Corero Network Security make effective use of its retained earnings?
Since Corero Network Security does not pay any dividends to its shareholders, we infer that the company has reinvested all its profits to grow its business.
Overall, we think Corero Network Security performed quite well. In particular, it is good to see that the company is investing heavily in its business and, along with a high rate of return, this has resulted in significant growth in its profits. That said, in studying current analyst estimates, we were concerned that while the company has increased earnings in the past, analysts expect earnings to decline in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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