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International Petroleum's (TSE:IPCO) stock is up by a considerable 17% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to International Petroleum's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for International Petroleum
How Do You 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 International Petroleum is:
23% = US$223m ÷ US$979m (Based on the trailing twelve months to June 2023).
The 'return' is the yearly profit. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.23 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
International Petroleum's Earnings Growth And 23% ROE
First thing first, we like that International Petroleum has an impressive ROE. Even when compared to the industry average of 20% the company's ROE is pretty decent. Given the circumstances, the significant 36% net income growth seen by International Petroleum over the last five years is not surprising.
As a next step, we compared International Petroleum'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 41% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. Is International Petroleum fairly valued compared to other companies? These 3 valuation measures might help you decide.