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ShaMaran Petroleum's (CVE:SNM) stock is up by a considerable 47% 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 ShaMaran 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for ShaMaran Petroleum
How Is ROE Calculated?
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 ShaMaran Petroleum is:
34% = US$73m ÷ US$215m (Based on the trailing twelve months to September 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.34 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.
ShaMaran Petroleum's Earnings Growth And 34% ROE
Firstly, we acknowledge that ShaMaran Petroleum has a significantly high ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. As a result, ShaMaran Petroleum's exceptional 47% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing with the industry net income growth, we found that ShaMaran Petroleum's growth is quite high when compared to the industry average growth of 38% in the same period, which is great to see.
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 ShaMaran Petroleum fairly valued compared to other companies? These 3 valuation measures might help you decide.