California Software Company Limited (NSE:CALSOFT) Stocks are down but fundamentals look decent: Will the market correct the stock price going forward?
With its stock down 25% in the past three months, it’s easy to overlook California Software (NSE: CALSOFT). However, stock prices are usually determined by a company’s long-term finances, which in this case seem quite respectable. In particular, we’ll be paying attention to California Software’s ROE today.
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 other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for California Software
How is ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for California Software is:
47% = ₹59m ÷ ₹124m (Based on last twelve months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. This means that for every ₹1 of equity, the company generated ₹0.47 of profit.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge 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 compared to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of California Software’s earnings growth and 47% ROE
For starters, California Software has a pretty high ROE, which is interesting. Additionally, the company’s ROE is above the industry average of 12%, which is quite remarkable. Needless to say, we’re quite surprised to see that California Software’s net income has declined 8.0% over the past five years. So there could be other aspects that could explain this. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.
However, when we compared California Software’s growth with the industry, we found that although the company’s earnings declined, the industry experienced 15% earnings growth over the same period. . It’s quite worrying.
Earnings growth is an important metric to consider when evaluating a stock. 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. If you’re wondering about California Software’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Is California Software Reinvesting Profits Effectively?
Since California Software pays no dividends, we infer that it keeps all of its earnings, which is rather confusing considering that there’s no earnings growth to show. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
All in all, it looks like California Software has positives for its business. However, given the high ROE and strong earnings retention, we would expect the company to post strong earnings growth, but that is not the case here. This suggests that there might be an external threat to the business, which is hampering its growth. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. Our risk dashboard would have the 3 risks we identified for California Software.
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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.