It's easy to ignore Corporate Travel Management (ASX:CTD), with the share price down 12% in the last three months. Since a company's long term performance often determines market outcomes, we decided to study the company's financials to determine if the downward trend will continue. In this article, we've decided to focus on Corporate Travel Management's ROE.
Return on equity (ROE) is a key indicator used to assess how efficiently a company's management is utilizing their capital. Simply put, it measures a company's profitability relative to shareholder's capital.
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How to Calculate Return on Equity?
ROE can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) / Shareholders' Equity
So, based on the above formula, the ROE for Corporate Travel Management is:
9.6% = AU$113m ÷ AU$1.2b (Based on the trailing twelve months to December 2023).
The “return” refers to annual profit, meaning that for every A$1 of shareholder investment, the company generates A$0.10 in profit.
Why is ROE important for earnings growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits a company reinvests or “retains”, we are able to evaluate a company's future profit-generating ability. Assuming all else is equal, companies with both a higher return on equity and retained profits typically have higher growth rates compared to companies that don't have the same characteristics.
Corporate Travel Management's revenue growth and 9.6% ROE
At first glance, Corporate Travel Management's ROE doesn't look all that attractive. However, given that the company's ROE is in line with the industry average ROE of 9.6%, it might give us some pause. That said, Corporate Travel Management's net income growth over the past five years has been more or less flat. Recall that the company's ROE isn't particularly stellar to begin with, so this goes some way to explaining why the company's earnings growth has been flat.
As a next step, we compared Corporate Travel Management's net income growth with the industry and found that the average industry growth rate over the same period was 3.4%.
Earnings growth is an important metric to consider when valuing a stock. Investors need to see if the expected earnings growth or decline, in either case, is priced in. Doing so will tell them if the stock is heading into brighter waters or if swampy waters await. Is CTD fairly valued? This infographic on the company's intrinsic value tells you all you need to know.
Is your corporate travel management department making good use of retained profits?
Corporate Travel Management's three-year median dividend payout ratio is high at 57% (or a retention ratio of 43%), meaning the company is paying out most of its profits as dividends to shareholders, which goes some way to explaining why the company's earnings aren't growing.
Additionally, Corporate Travel Management has been paying dividends for at least ten years, which means the company's management is determined to pay dividends even with little to no earnings growth. Our most recent analyst data suggests that the company's dividend payout ratio over the next three years is expected to be around 52%. Nevertheless, while the company's dividend payout ratio is not expected to change much, Corporate Travel Management's future ROE is predicted to rise to 13%.
Conclusion
Overall, Corporate Travel Management's performance has been quite disappointing. The company's revenue growth has been disappointing, due to a low ROE and low reinvestment in the business. That said, we looked at the latest analyst forecasts and found that while the company has shrinking its revenue in the past, analysts are expecting revenue to grow in the future. If you want to know more about the company's future revenue growth forecasts, take a look at this free report on analyst forecasts for the company.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
