Uranium Royalty's (TSE:URC) stock is up by a considerable 25% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Uranium Royalty's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Uranium Royalty

How Is ROE Calculated?

ROE 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 Uranium Royalty is:

3.2% = CA$8.7m ÷ CA$274m (Based on the trailing twelve months to July 2024).

The 'return' is the profit 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$0.03 in profit.

What Is The Relationship Between ROE And 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 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.

Uranium Royalty's Earnings Growth And 3.2% ROE

It is quite clear that Uranium Royalty's ROE is rather low. Not just that, even compared to the industry average of 11%, the company's ROE is entirely unremarkable. In spite of this, Uranium Royalty was able to grow its net income considerably, at a rate of 34% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Uranium Royalty's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 38% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Uranium Royalty fairly valued compared to other companies? These 3 valuation measures might help you decide.