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Most readers would already be aware that Tamarack Valley Energy's (TSE:TVE) stock increased significantly by 25% over the past 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. In this article, we decided to focus on Tamarack Valley Energy's ROE.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Tamarack Valley Energy
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Tamarack Valley Energy is:
9.5% = CA$203m ÷ CA$2.2b (Based on the trailing twelve months to June 2023).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.09 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Tamarack Valley Energy's Earnings Growth And 9.5% ROE
When you first look at it, Tamarack Valley Energy's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 20%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Tamarack Valley Energy was able to grow its net income considerably, at a rate of 46% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing Tamarack Valley Energy's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 41% over the last few years.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for TVE? You can find out in our latest intrinsic value infographic research report.