Tornado Global Hydrovacs (CVE:TGH) has had a great run on the share market with its stock up by a significant 27% over the last 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. In this article, we decided to focus on Tornado Global Hydrovacs' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Tornado Global Hydrovacs
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 Tornado Global Hydrovacs is:
16% = CA$2.8m ÷ CA$17m (Based on the trailing twelve months to March 2023).
The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.16.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Tornado Global Hydrovacs' Earnings Growth And 16% ROE
To begin with, Tornado Global Hydrovacs seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 4.2%. This probably laid the ground for Tornado Global Hydrovacs' moderate 17% net income growth seen over the past five years.
As a next step, we compared Tornado Global Hydrovacs' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 17% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Tornado Global Hydrovacs''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.