With its stock down 21% over the past three months, it is easy to disregard Ceapro (CVE:CZO). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Ceapro's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Ceapro
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Ceapro is:
6.9% = CA$2.2m ÷ CA$32m (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. That means that for every CA$1 worth of shareholders' equity, the company generated 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. 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.
Ceapro's Earnings Growth And 6.9% ROE
On the face of it, Ceapro's ROE is not much to talk about. Next, when compared to the average industry ROE of 27%, the company's ROE leaves us feeling even less enthusiastic. Despite this, surprisingly, Ceapro saw an exceptional 63% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Ceapro's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 42%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Ceapro's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.