Could It Mean A Stock Price Drop In The Future?

Colonial Motor’s (NZSE:CMO) stock is up by 4.3% over the past month. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Particularly, we will be paying attention to Colonial Motor’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. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Trump has pledged to “unleash” American oil and gas and these 15 US stocks have developments that are poised to benefit.

ROE 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 Colonial Motor is:

6.2% = NZ$20m ÷ NZ$312m (Based on the trailing twelve months to June 2025).

The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.06 in profit.

Check out our latest analysis for Colonial Motor

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

On the face of it, Colonial Motor’s ROE is not much to talk about. Next, when compared to the average industry ROE of 13%, the company’s ROE leaves us feeling even less enthusiastic. Given the circumstances, the significant decline in net income by 18% seen by Colonial Motor over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company’s earnings prospects. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

However, when we compared Colonial Motor’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 4.9% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Colonial Motor’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Colonial Motor has a high three-year median payout ratio of 74% (that is, it is retaining 26% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 3 risks we have identified for Colonial Motor by visiting our risks dashboard for free on our platform here.

Moreover, Colonial Motor has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Overall, we would be extremely cautious before making any decision on Colonial Motor. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we’ve only made a short study of the company’s growth data. To gain further insights into Colonial Motor’s past profit growth, check out this visualization of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.