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Brookfield Renewable (TSE:BEPC) has had a great run on the share market with its stock up by a significant 13% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Brookfield Renewable'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Brookfield Renewable
How To 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 Brookfield Renewable is:
6.9% = US$1.0b ÷ US$15b (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.07 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. 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. 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.
Brookfield Renewable's Earnings Growth And 6.9% ROE
On the face of it, Brookfield Renewable's ROE is not much to talk about. However, its ROE is similar to the industry average of 8.5%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Brookfield Renewable's net income grew significantly at a rate of 40% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Brookfield Renewable's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 40% in the same period.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Brookfield Renewable is trading on a high P/E or a low P/E, relative to its industry.