Css attributes

Will the market correct the stock price in the future?

Clean Seas Seafood (ASX:CSS) had a tough month with an 11% drop in its share price. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we decided to focus on the ROE of Clean Seas Seafood.

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. In simpler terms, it measures a company’s profitability relative to equity.

See our latest review for Clean Seas Seafood

How is ROE calculated?

Return on equity can be calculated using the formula:

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

So, based on the above formula, the ROE for Clean Seas Seafood is:

11% = AU$8.7 million ÷ AU$81 million (based on trailing 12 months to June 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every Australian dollar of equity, the company generated a profit of 0.11 Australian dollars.

What is the relationship between ROE and 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. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Profit growth and 11% ROE of Clean Seas Seafood

For starters, Clean Seas Seafood seems to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 8.1%. As you might expect, the 44% drop in net income reported by Clean Seas Seafood is a bit of a surprise. We feel there could be other factors at play here that are preventing the company from growing. These include poor revenue retention or poor capital allocation.

That being said, we benchmarked Clean Seas Seafood’s performance against the industry and were alarmed when we found that although the company reduced profits, the industry increased profits at a rate of 9.6% over the same period.

past earnings-growth

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. 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 if the stock is headed for clear blue waters or if swampy waters are waiting. A 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 outlook. Thus, you might want to check whether Clean Seas Seafood is trading on a high P/E or a low P/E, relative to its industry.

Does Clean Seas Seafood use its profits effectively?

Clean Seas Seafood pays no dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it can’t use them to grow its business. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.

Conclusion

All in all, it seems that Clean Seas Seafood has positive aspects for its business. However, we are disappointed to see a lack of earnings growth, even despite a high ROE and high reinvestment rate. We believe there could be external factors that could negatively impact the business. That said, the latest forecasts from industry analysts show that analysts are expecting a slight improvement in the company’s future earnings growth. This could offer some relief to the company’s existing shareholders. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also 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 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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