Yahoo Finance Power Corporation of Canada's (TSE:POW) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?
Power Corporation of Canada's (TSE:POW) stock up by 4.5% over the past three months. 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 an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Is ROE Calculated?
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 Power Corporation of Canada is:
7.2% = CA$3.0b ÷ CA$41b (Based on the trailing twelve months to September 2023).
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$0.07.
What Has ROE Got To Do With 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. 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.
Power Corporation of Canada's Earnings Growth And 7.2% 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 12% either. Power Corporation of Canada was still able to see a decent net income growth of 14% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.
Next, on comparing Power Corporation of Canada's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.
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. Is POW fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Power Corporation of Canada Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 52% (or a retention ratio of 48%) 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.
Besides, Power Corporation of Canada has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 48%. Still, forecasts suggest that Power Corporation of Canada's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.
Summary
In total, it does look like Power Corporation of Canada has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
