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SandRidge Energy's (NYSE:SD) stock is up by a considerable 11% over the past month. 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 SandRidge Energy's ROE today.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for SandRidge Energy
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for SandRidge Energy is:
45% = US$231m ÷ US$512m (Based on the trailing twelve months to March 2023).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.45 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 SandRidge Energy's Earnings Growth And 45% ROE
To begin with, SandRidge Energy has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 32% the company's ROE is quite impressive. So, the substantial 34% net income growth seen by SandRidge Energy over the past five years isn't overly surprising.
As a next step, we compared SandRidge Energy's 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 22%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is SandRidge Energy fairly valued compared to other companies? These 3 valuation measures might help you decide.