Yahoo Finance Do Fundamentals Have Any Role To Play In Driving Power Corporation of Canada's (TSE:POW) Stock Up Recently?
Most readers would already know that Power Corporation of Canada's (TSE:POW) stock increased by 3.4% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Specifically, we decided to study Power Corporation of Canada's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Power Corporation of Canada
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 Power Corporation of Canada is:
8.0% = CA$3.5b ÷ CA$44b (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.08.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Power Corporation of Canada's Earnings Growth And 8.0% ROE
When you first look at it, Power Corporation of Canada's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. Power Corporation of Canada was still able to see a decent net income growth of 18% over the past five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
We then performed a comparison between Power Corporation of Canada's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 21% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is POW worth today? The intrinsic value infographic in our free research report helps visualize whether POW is currently mispriced by the market.
Is Power Corporation of Canada Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 57% (or a retention ratio of 43%) for Power Corporation of Canada suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Additionally, Power Corporation of Canada has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 50%. Regardless, the future ROE for Power Corporation of Canada is predicted to rise to 10% despite there being not much change expected in its payout ratio.
Conclusion
On the whole, we do feel that Power Corporation of Canada has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions 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 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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