Most readers would already be aware that Geo Energy Resources' (SGX:RE4) stock increased significantly by 43% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention toGeo Energy Resources'ROE today.
How To Calculate Return On Equity?
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Return on equity 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 Geo Energy Resources is:
51% = US$179m ÷ US$349m (Based on the trailing twelve months to December 2021).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.51 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Geo Energy Resources' Earnings Growth And 51% ROE
First thing first, we like that Geo Energy Resources has an impressive ROE. Secondly, even when compared to the industry average of 20% the company's ROE is quite impressive. As a result, Geo Energy Resources' exceptional 30% net income growth seen over the past five years, doesn't come as a surprise.
We then performed a comparison between Geo Energy Resources' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 29% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want tocheck if Geo Energy Resources is trading on a high P/E or a low P/E, relative to its industry.
Is Geo Energy Resources Making Efficient Use Of Its Profits?
Geo Energy Resources' three-year median payout ratio to shareholders is 20%, which is quite low. This implies that the company is retaining 80% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Additionally, Geo Energy Resources has paid dividends over a period of five 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 17%. Still, forecasts suggest that Geo Energy Resources' future ROE will drop to 17% even though the the company's payout ratio is not expected to change by much.
Conclusion
In total, we are pretty happy with Geo Energy Resources' 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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink.$GEO ENERGY RESOURCES LIMITED(RE4.SI)$
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