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It is hard to get excited after looking at CES Energy Solutions' (TSE:CEU) recent performance, when its stock has declined 6.5% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to CES Energy Solutions' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for CES Energy Solutions
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 CES Energy Solutions is:
25% = CA$190m ÷ CA$762m (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 CA$1 of its shareholder's investments, the company generates a profit of CA$0.25.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
A Side By Side comparison of CES Energy Solutions' Earnings Growth And 25% ROE
Firstly, we acknowledge that CES Energy Solutions has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 16% also doesn't go unnoticed by us. So, the substantial 54% net income growth seen by CES Energy Solutions over the past five years isn't overly surprising.
We then performed a comparison between CES Energy Solutions' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 54% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. 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. What is CEU worth today? The intrinsic value infographic in our free research report helps visualize whether CEU is currently mispriced by the market.