Most readers would already be aware that Thor Explorations' (CVE:THX) stock increased significantly by 48% 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 Thor Explorations' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 Thor Explorations is:

30% = US$50m ÷ US$168m (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.30 in profit.

Check out our latest analysis for Thor Explorations

Why Is ROE Important For 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.

Thor Explorations' Earnings Growth And 30% ROE

Firstly, we acknowledge that Thor Explorations has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. So, the substantial 63% net income growth seen by Thor Explorations over the past five years isn't overly surprising.

As a next step, we compared Thor Explorations' 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 21%.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Thor Explorations''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.