Athabasca Oil's (TSE:ATH) stock is up by a considerable 5.5% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Athabasca Oil's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Athabasca Oil

How Do You Calculate Return On Equity?

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 Athabasca Oil is:

2.6% = CA$44m ÷ CA$1.7b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Athabasca Oil's Earnings Growth And 2.6% ROE

It is quite clear that Athabasca Oil's ROE is rather low. Even when compared to the industry average of 9.6%, the ROE figure is pretty disappointing. In spite of this, Athabasca Oil was able to grow its net income considerably, at a rate of 49% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Athabasca Oil's growth is quite high when compared to the industry average growth of 39% in the same period, which is great to see.

Earnings growth is a huge 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Athabasca Oil's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.