Yahoo Finance Will Weakness in Orca Energy Group Inc.'s (CVE:ORC.B) Stock Prove Temporary Given Strong Fundamentals?
With its stock down 7.7% over the past three months, it is easy to disregard Orca Energy Group (CVE:ORC.B). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Orca Energy Group's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Orca Energy Group
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Orca Energy Group is:
40% = US$34m ÷ US$86m (Based on the trailing twelve months to September 2020).
The 'return' refers to a company's earnings over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.40 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Orca Energy Group's Earnings Growth And 40% ROE
First thing first, we like that Orca Energy Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 8.0% also doesn't go unnoticed by us. As a result, Orca Energy Group's exceptional 66% net income growth seen over the past five years, doesn't come as a surprise.
We then compared Orca Energy Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 37% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Orca Energy Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Orca Energy Group Efficiently Re-investing Its Profits?
Orca Energy Group's ' three-year median payout ratio is on the lower side at 18% implying that it is retaining a higher percentage (82%) of its profits. So it looks like Orca Energy Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Along with seeing a growth in earnings, Orca Energy Group only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.
Conclusion
On the whole, we feel that Orca Energy Group's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 3 risks we have identified for Orca Energy Group visit our risks dashboard for free.
This article by Simply Wall St is general in nature. 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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