Most readers will already know that the Po Valley Energy (ASX:PVE) share price has increased by a significant 5.4% in the last month. As most people know, fundamentals typically guide market price movements over the long term, so today we'll take a look at the company's key financial metrics to see if they play any role in the recent price movement. I decided to judge. In this article, we decided to focus on Po Valley Energy'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, ROE shows the profit generated per dollar of a shareholder's investment.
Check out our latest analysis for Po Valley Energy.
How do you calculate return on equity?
of Calculation formula for return on equity teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Po Valley Energy's ROE is:
4.3% = €587,000 ÷ €14 million (based on the trailing twelve months to December 2023).
“Return” is the profit over the past 12 months. That means for every AU$1 of shareholders' equity, the company generated AU$0.04 of his profit.
What relationship does ROE have with profit growth?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
A side-by-side comparison of Po Valley Energy's earnings growth rate and ROE of 4.3%.
At first glance, Poe Valley Energy's ROE doesn't seem to be all that interesting. A quick look into it shows that the company's ROE is less than the industry average of 15%. Nevertheless, surprisingly, Po Valley Energy posted an exceptional net income growth of 25% over the past five years. We believe that other factors may be at play here. Maintaining high profits and efficient management, etc.
We then compared Po Valley Energy's net income growth rate with the industry and found that the company's growth rate is lower than the industry average growth rate of 33% over the same five-year period, which is a bit concerning.
Earnings growth is a big factor in stock valuation. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. Doing so will help you determine whether a stock's future is promising or ominous. If you're curious about Po Valley Energy's valuation, check out this gauge of its price-to-earnings ratio compared to its industry.
Is Po Valley Energy effectively utilizing its retained earnings?
Po Valley Energy does not pay regular dividends to shareholders. This means that the company reinvests all of its profits back into the business. This is likely what is driving the high earnings growth rate discussed above.
summary
Overall, we feel that Po Valley energy has some positive properties. That means decent growth in earnings backed by high reinvestment rates. However, we think that earnings growth could have been higher if the business had improved given the lower ROE. Especially considering the company reinvests a huge amount of its profits. We don't want to fire the company outright, but we try to see how risky the business is in order to make more informed decisions about the company. Our risks dashboard shows the two risks he has identified for Po Valley Energy.
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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.
