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It is hard to get excited after looking at Trican Well Service's (TSE:TCW) recent performance, when its stock has declined 14% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Trican Well Service's ROE.
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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
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 Trican Well Service is:
22% = CA$109m ÷ CA$488m (Based on the trailing twelve months to December 2024).
The 'return' is the profit over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.22 in profit.
See our latest analysis for Trican Well Service
What Has ROE Got To Do With 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.
A Side By Side comparison of Trican Well Service's Earnings Growth And 22% ROE
Firstly, we acknowledge that Trican Well Service has a significantly high ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. As a result, Trican Well Service's exceptional 69% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Trican Well Service'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 56%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Trican Well Service fairly valued compared to other companies? These 3 valuation measures might help you decide.