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Grey Wolf Animal Health (CVE:WOLF) has had a great run on the share market with its stock up by a significant 28% over the last week. 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. Specifically, we decided to study Grey Wolf Animal Health's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Grey Wolf Animal Health
How To Calculate Return On Equity?
Return on equity 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 Grey Wolf Animal Health is:
2.8% = CA$702k ÷ CA$25m (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.03 in profit.
Why Is ROE Important For 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.
Grey Wolf Animal Health's Earnings Growth And 2.8% ROE
It is quite clear that Grey Wolf Animal Health's ROE is rather low. Even when compared to the industry average of 17%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Grey Wolf Animal Health grew its net income at a significant rate of 57% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Grey Wolf Animal Health'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 48% 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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Grey Wolf Animal Health's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.