Declining Stock and Decent Financials: Is The Market Wrong About Colabor Group Inc. (TSE:GCL)?

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With its stock down 2.6% over the past three months, it is easy to disregard Colabor Group (TSE:GCL). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Colabor Group’s ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

See our latest analysis for Colabor Group

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Colabor Group is:

5.2% = CA$4.7m ÷ CA$90m (Based on the trailing twelve months to June 2021).

The ‘return’ is the profit over the last twelve months. That means that for every CA$1 worth of shareholders’ equity, the company generated CA$0.05 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

Colabor Group’s Earnings Growth And 5.2% ROE

When you first look at it, Colabor Group’s ROE doesn’t look that attractive. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 14% either. However, we we’re pleasantly surprised to see that Colabor Group grew its net income at a significant rate of 60% in the last five years. Therefore, there could be other reasons behind this growth. Such as – high earnings retention or an efficient management in place.

As a next step, we compared Colabor Group’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Colabor Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Colabor Group Using Its Retained Earnings Effectively?

Given that Colabor Group doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we feel that Colabor Group certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Colabor Group.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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