It is hard to get excited after looking at BluMetric Environmental's (CVE:BLM) recent performance, when its stock has declined 48% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on BluMetric Environmental's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for BluMetric Environmental
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 BluMetric Environmental is:
26% = CA$2.8m ÷ CA$11m (Based on the trailing twelve months to March 2022).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.26 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. 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 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.
BluMetric Environmental's Earnings Growth And 26% ROE
Firstly, we acknowledge that BluMetric Environmental has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.1% which is quite remarkable. Under the circumstances, BluMetric Environmental's considerable five year net income growth of 30% was to be expected.
As a next step, we compared BluMetric Environmental'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 16%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about BluMetric Environmental's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.