Clarkson PLC's (LON:CKN) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?
Clarkson PLC's stock has risen by 8.0% over the past three months, attributed to its strong fundamentals, particularly a 15% return on equity (ROE). This ROE indicates effective capital reinvestment, contributing to a remarkable 41% net income growth over five years, surpassing the industry average of 30%. Clarkson maintains a low payout ratio of 39%, allowing for significant reinvestment. Despite forecasts suggesting a slowdown in earnings growth, the company's efficient profit utilization and consistent dividend payments reflect a solid financial performance.
Clarkson's (LON:CKN) stock is up by 8.0% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Clarkson's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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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 Clarkson is:
15% = UK£77m ÷ UK£494m (Based on the trailing twelve months to June 2025).
The 'return' is the yearly profit. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.15 in profit.
View our latest analysis for Clarkson
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Clarkson's Earnings Growth And 15% ROE
To start with, Clarkson's ROE looks acceptable. Even when compared to the industry average of 15% the company's ROE looks quite decent. This certainly adds some context to Clarkson's exceptional 41% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that Clarkson's growth is quite high when compared to the industry average growth of 30% in the same period, which is great to see.
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 Clarkson fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Clarkson Making Efficient Use Of Its Profits?
The three-year median payout ratio for Clarkson is 39%, which is moderately low. The company is retaining the remaining 61%. So it seems that Clarkson is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Moreover, Clarkson is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 47% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.
Conclusion
On the whole, we feel that Clarkson's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
