In This Article:
PetroTal's (TSE:TAL) stock is up by a considerable 36% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on PetroTal's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for PetroTal
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 PetroTal is:
22% = US$112m ÷ US$504m (Based on the trailing twelve months to September 2024).
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$0.22.
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.
PetroTal's Earnings Growth And 22% ROE
To begin with, PetroTal seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 12%. This probably laid the ground for PetroTal's significant 39% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.
We then performed a comparison between PetroTal's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 39% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. 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 PetroTal fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is PetroTal Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 50% (implying that it keeps only 50% of profits) for PetroTal suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.