Does a strong financial situation determine the market?

CRH (NYSE:CRH) stock is up a significant 7.3% over the past month. Given that the market rewards strong financials over the long term, we wonder if that’s the case here. Specifically, we decided to examine CRH’s ROE in this article.

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 simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for CRH

How to calculate return on equity?

This return on equity formula Is:

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

Therefore, based on the above formula, the ROE for CRH is:

16% = $3.2 billion ÷ $21 billion (Based on the trailing twelve months to March 2024).

The “return” is the annualized profit. This means that for every $1 of shareholders’ equity, the company generated $0.16 in profit.

What is the relationship between ROE and profit growth?

We have already established that ROE serves as an effective profit-generating indicator of a company’s future earnings. Depending on how much of those earnings a company reinvests or “retains,” and how effectively it does so, we are able to assess the company’s earnings growth potential. Generally speaking, assuming other factors are equal, companies with high ROE and earnings retention have higher growth rates than companies that do not share these characteristics.

CRH profit growth and 16% ROE

At first glance, CRH seems to have a decent ROE. What’s more, the company’s ROE is similar to the industry average of 15%. This probably goes some way to explaining CRH’s moderate growth of 19% over the past five years, among other factors.

Next, when comparing CRH’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 21% over the past few years.

Earnings growth is an important metric to consider when valuing a stock. An investor should try to determine whether the expected earnings growth or decline, as the case may be, is priced into the price. This will help them determine whether the stock’s future looks promising or dire. How much is CRH worth today? The intrinsic value infographic in our free research report helps visualize whether CRH is currently mispriced by the market.

Does CRH reinvest its profits effectively?

CRH has a favorable combination of a moderate three-year median payout of 37% (or a retention ratio of 63%) and respectable earnings growth, indicating that the company is using its earnings efficiently.

The story continues

Furthermore, CRH is committed to continuing to share its profits with shareholders, as evidenced by its long history of paying dividends for at least ten years. Our latest research shows that the company’s future payout ratio is expected to decline to 26% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change much.

summary

Overall, we are pleased with CRH’s performance. We particularly like that the company is reinvesting a large portion of its profits at a high rate of return. This has of course resulted in the company posting significant earnings growth. With this in mind, the latest industry analyst forecasts reveal that the company’s earnings growth is set to slow down. 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 for general information purposes only. Our commentary is based solely on historical data and analyst forecasts, and is based on an objective methodology. 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 your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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