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It is hard to get excited after looking at FP Newspapers' (CVE:FP) recent performance, when its stock has declined 5.2% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on FP Newspapers' 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 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 FP Newspapers
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for FP Newspapers is:
10% = CA$822k ÷ CA$8.1m (Based on the trailing twelve months to March 2022).
The 'return' is the yearly profit. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.10.
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 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.
A Side By Side comparison of FP Newspapers' Earnings Growth And 10% ROE
To start with, FP Newspapers' ROE looks acceptable. Yet, the fact that the company's ROE is lower than the industry average of 13% does temper our expectations. Still, we can see that FP Newspapers has seen a remarkable net income growth of 65% over the past five years. Therefore, there could be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.
As a next step, we compared FP Newspapers' 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 32%.
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. Is FP fairly valued? This infographic on the company's intrinsic value has everything you need to know.