Surge Energy (TSE:SGY) has had a rough three months with its share price down 20%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Surge Energy’s 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.
Check out our latest analysis for Surge Energy
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 Surge Energy is:
28% = CA$161m ÷ CA$564m (Based on the trailing twelve months to June 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$0.28 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. 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.
A Side By Side comparison of Surge Energy’s Earnings Growth And 28% ROE
To begin with, Surge Energy has a pretty high ROE which is interesting. Further, even comparing with the industry average if 24%, the company’s ROE is quite respectable. So, Surge Energy’s moderate 9.2% growth over the past five years was probably backed by the high ROE.
We then compared Surge Energy’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 26% in the same period, which is a bit concerning.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Surge Energy is trading on a high P/E or a low P/E, relative to its industry.
Is Surge Energy Using Its Retained Earnings Effectively?
In Surge Energy’s case, its respectable earnings growth can probably be explained by its low LTM (or last twelve month) payout ratio of 1.7% (or a retention ratio of 98%), which suggests that the company is investing most of its profits to grow its business.
Additionally, Surge Energy has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 16% over the next three years.
On the whole, we feel that Surge Energy’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. That being so, according to the latest industry analyst forecasts, the company’s earnings are expected to shrink in the future. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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