Are Robust Financials Driving The Recent Rally In CRA International, Inc.'s (NASDAQ:CRAI) Stock?

Simply Wall St · 10/14 15:53

CRA International (NASDAQ:CRAI) has had a great run on the share market with its stock up by a significant 14% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to CRA International's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for CRA International

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 CRA International is:

21% = US$40m ÷ US$192m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.21.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

CRA International's Earnings Growth And 21% ROE

At first glance, CRA International seems to have a decent ROE. Especially when compared to the industry average of 16% the company's ROE looks pretty impressive. This probably laid the ground for CRA International's moderate 14% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that CRA International's growth is quite high when compared to the industry average growth of 9.9% in the same period, which is great to see.

past-earnings-growth
NasdaqGS:CRAI Past Earnings Growth October 14th 2024

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for CRAI? You can find out in our latest intrinsic value infographic research report.

Is CRA International Using Its Retained Earnings Effectively?

In CRA International's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 23% (or a retention ratio of 77%), which suggests that the company is investing most of its profits to grow its business.

Besides, CRA International has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with CRA International's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.