editorial-team@simplywallst.com (Simply Wall St)
4 min read
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With its stock down 25% over the past three months, it is easy to disregard Corbion (AMS:CRBN). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Corbion’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
We’ve discovered 2 warning signs about Corbion. View them for free.
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Corbion is:
5.9% = €46m ÷ €773m (Based on the trailing twelve months to December 2024).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders’ capital it has, the company made €0.06 in profit.
View our latest analysis for Corbion
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
At first glance, Corbion’s ROE doesn’t look very promising. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 10% either. As a result, Corbion reported a very low income growth of 2.8% over the past five years.
When you consider the fact that the industry earnings have shrunk at a rate of 6.0% in the same 5-year period, the company’s net income growth is pretty remarkable.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Corbion is trading on a high P/E or a low P/E, relative to its industry.
