Stock Futures – Corteva, Inc.’s (NYSE:CTVA) Financials Are Too Obscure To Link With Current Share price Momentum: What’s In Store For the Stock?

Corteva’s (NYSE:CTVA) stock is up by a considerable 32% over the past three months. But the company’s key financial indicators appear to be differing across the board and that makes us question whether or not the company’s current share price momentum can be maintained. Particularly, we will be paying attention to Corteva’s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Corteva

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Corteva is:

2.5% = US$615m ÷ US$24b (Based on the trailing twelve months to September 2020).

The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.03 in profit.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

Corteva’s Earnings Growth And 2.5% ROE

It is hard to argue that Corteva’s ROE is much good in and of itself. Not just that, even compared to the industry average of 10%, the company’s ROE is entirely unremarkable. For this reason, Corteva’s five year net income decline of 14% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as – low earnings retention or poor allocation of capital.

So, as a next step, we compared Corteva’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 7.2% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Is CTVA fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Corteva Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 32% (where it is retaining 68% of its profits), Corteva has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Corteva only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 26% of its profits over the next three years. Still, forecasts suggest that Corteva’s future ROE will rise to 6.6% even though the the company’s payout ratio is not expected to change by much.

Conclusion

In total, we’re a bit ambivalent about Corteva’s performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. 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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