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Most readers would already be aware that Mazarin's (CVE:MAZ.H) stock increased significantly by 23% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Mazarin's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Mazarin
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 Mazarin is:
27% = CA$2.6m ÷ CA$9.7m (Based on the trailing twelve months to September 2024).
The 'return' is the yearly profit. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.27 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Mazarin's Earnings Growth And 27% ROE
Firstly, we acknowledge that Mazarin has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 9.4% which is quite remarkable. So, the substantial 24% net income growth seen by Mazarin over the past five years isn't overly surprising.
We then performed a comparison between Mazarin's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 24% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Mazarin is trading on a high P/E or a low P/E, relative to its industry.