Energy One (ASX:EOL) has had a rough three months with its share price down 9.7%. 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. Particularly, we will be paying attention to Energy One’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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Energy One

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 Energy One is:

10% = AU$3.6m ÷ AU$34m (Based on the trailing twelve months to June 2022).

The ‘return’ refers to a company’s earnings over the last year. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.10.

What Is The Relationship Between ROE And 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.

A Side By Side comparison of Energy One’s Earnings Growth And 10% ROE

To begin with, Energy One seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.7%. Consequently, this likely laid the ground for the impressive net income growth of 38% seen over the past five years by Energy One. We reckon that there could also be other factors at play here. Such as – high earnings retention or an efficient management in place.

 

We then compared Energy One’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 20% 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. Is Energy One fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Energy One Using Its Retained Earnings Effectively?

Energy One’s three-year median payout ratio is a pretty moderate 45%, meaning the company retains 55% of its income. So it seems that Energy One is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.

Additionally, Energy One has paid dividends over a period of six 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 40%. However, Energy One’s ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with Energy One’s performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

By: NickPosted on Categories: BUSINESS