Yahoo Finance Could The Market Be Wrong About Eneraqua Technologies plc (LON:ETP) Given Its Attractive Financial Prospects?
Eneraqua Technologies (LON:ETP) has had a rough month with its share price down 6.3%. 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 Eneraqua Technologies' ROE today.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Eneraqua Technologies
How To 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 Eneraqua Technologies is:
18% = UK£3.3m ÷ UK£18m (Based on the trailing twelve months to July 2022).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.18.
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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Eneraqua Technologies' Earnings Growth And 18% ROE
To start with, Eneraqua Technologies' ROE looks acceptable. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. Probably as a result of this, Eneraqua Technologies was able to see an impressive net income growth of 57% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Eneraqua Technologies' growth is quite high when compared to the industry average growth of 8.5% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. 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 Eneraqua Technologies fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Eneraqua Technologies Making Efficient Use Of Its Profits?
Eneraqua Technologies' ' three-year median payout ratio is on the lower side at 8.2% implying that it is retaining a higher percentage (92%) of its profits. So it looks like Eneraqua Technologies is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Along with seeing a growth in earnings, Eneraqua Technologies only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.
Conclusion
On the whole, we feel that Eneraqua Technologies' 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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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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