Yahoo Finance Is Weakness In Birchcliff Energy Ltd. (TSE:BIR) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
With its stock down 15% over the past month, it is easy to disregard Birchcliff Energy (TSE:BIR). 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 Birchcliff Energy's ROE today.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Birchcliff Energy
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Birchcliff Energy is:
29% = CA$695m ÷ CA$2.4b (Based on the trailing twelve months to September 2022).
The 'return' is the yearly profit. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.29 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Birchcliff Energy's Earnings Growth And 29% ROE
First thing first, we like that Birchcliff Energy has an impressive ROE. Additionally, a comparison with the average industry ROE of 25% also portrays the company's ROE in a good light. As a result, Birchcliff Energy's remarkable 62% net income growth seen over the past 5 years is likely aided by its high ROE.
As a next step, we compared Birchcliff Energy'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 34%.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for BIR? You can find out in our latest intrinsic value infographic research report.
Is Birchcliff Energy Using Its Retained Earnings Effectively?
Birchcliff Energy has a really low three-year median payout ratio of 2.0%, meaning that it has the remaining 98% left over to reinvest into its business. So it looks like Birchcliff Energy is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, Birchcliff Energy has paid dividends over a period of six 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 50% over the next three years.
Summary
On the whole, we feel that Birchcliff 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. Unsurprisingly, this has led to an impressive earnings growth.
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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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