Grand Canyon Education (NASDAQ:LOPE) stock is up a whopping 35% over the past month. As most know, it is fundamentals that usually drive market price movements over the long term. Therefore, we decided to look at the company’s key financial indicators today to see if they play a role in the recent price action. In this article, we decided to focus on Grand Canyon Education’s ROE.
Return on Equity or ROE is an important factor to consider by a shareholder as it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates in relation to its shareholders’ investments.
Check out our latest analysis for Grand Canyon Education
How do you calculate return on equity?
That Formula for ROE is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Grand Canyon Education is:
34% = $199M ÷ $592M (based on trailing 12 months ended September 2022).
The “return” is the annual profit. One way to conceptualize this is that for every $1 in shareholder equity, the company makes $0.34 in profit.
What is the relationship between ROE and earnings growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest, or “retain,” we are then able to assess a company’s future ability to generate profits. In general, companies with a high return on equity and earnings retention, all other things being equal, have a higher growth rate than companies that do not share these characteristics.
Grand Canyon Education revenue growth and 34% ROE
First off, Grand Canyon Education has a pretty high ROE, which is interesting. Second, the company’s ROE itself is pretty impressive compared to the industry average of 12%. For some reason, however, those higher returns aren’t reflected in Grand Canyon Education’s meager five-year net income growth averaging 2.8%. That’s a bit unexpected from a company that has such a high yield. Such a scenario is likely to occur when a company pays out a large portion of its earnings as dividends or faces competitive pressures.
We then compared Grand Canyon Education’s net income growth to that of the industry and found that the company’s growth figure is lower than the industry’s average growth rate of 9.6% over the same period, which is a bit concerning.
Earnings growth is an important factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). That way they have an idea of whether the stock is headed into clear blue waters or if swampy waters await them. Has the market priced in the future prospects for LOPE? You can find out in our latest intrinsic value research report in the form of an infographic.
Is Grand Canyon Education using its profits efficiently?
Grand Canyon Education doesn’t pay a dividend, which means it keeps all of its earnings. However, there was very little earnings growth to show. So there could be other factors at play here that could potentially hamper growth. For example, the business has faced some headwinds.
Overall, it looks like Grand Canyon Education has some positives in its business. However, we are disappointed to see a lack of earnings growth despite a high ROE and high reinvestment rate. We believe there could be some external factors that could negatively impact the business. Against this background, the latest analyst forecasts show that the company will continue to increase its profits. Are these analyst expectations based on broader expectations for the industry or on company fundamentals? Click here to go to our analyst’s forecast page for the company.
The assessment is complex, but we help to simplify it.
find out if Grand Canyon Formation may be over or under priced by reviewing our comprehensive analysis which includes the following Fair Value Estimates, Risks and Warnings, Dividends, Insider Trading and Financial Health.
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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. 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.