Most readers will already know that the Central Petroleum (ASX:CTP) share price has increased by 4.7% over the past three months. Usually the market pays for a company's long-term financial health, so we decided to examine a company's fundamentals to see if they might be influencing the market. Did. This time, I decided to focus on Central Oil's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. In other words, this reveals that the company has been successful in turning shareholder investments into profits.
Check out our latest analysis for Central Petroleum.
How is ROE calculated?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, the ROE for Central Oil is:
51% = AU$17 million ÷ AU$34 million (based on the trailing twelve months to December 2023).
“Revenue” is the income a company has earned over the past year. One way he conceptualizes this is that for every A$1 of shareholders' equity, the company earned him A$0.51 of profit.
What is the relationship between ROE and profit growth rate?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. Generally speaking, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Central Petroleum's Earnings Growth and ROE 51%
First of all, we like that Central Petroleum has a good ROE. Second, his ROE for the company is very good, even when compared to the industry average of 15%. As a result, the exceptional 28% growth in Central Petroleum's net income over the past five years is no surprise.
We then compared Central Oil's net income growth rate with the industry and found that the company's reported growth rate is similar to the industry's average growth rate of 33% over the past few years.
The foundations that give a company value have a lot to do with its revenue growth. Investors should check whether expected growth or decline in earnings has been factored in in any case. This will help you determine whether the stock's future is bright or bleak. 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 outlook. So you might want to check whether Central Petroleum is trading on a high P/E or a low P/E relative to its industry.
Is Central Oil using its profits effectively?
Given that Central Oil does not pay dividends to shareholders, we can assume that the company reinvests all of its profits into growing its business.
summary
Overall, we are very satisfied with Central Petroleum's performance. In particular, it's great to see that the company has invested heavily in its business, delivering strong revenue growth along with high rates of return. Having said that, we looked at current analyst forecasts and found that while the company has grown earnings in the past, we are concerned that analysts expect earnings to shrink in the future. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
