Yahoo Finance Topaz Energy Corp.'s (TSE:TPZ) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?
Topaz Energy (TSE:TPZ) has had a great run on the share market with its stock up by a significant 15% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Topaz Energy's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Topaz Energy
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 Topaz Energy is:
3.8% = CA$48m ÷ CA$1.2b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.04 in profit.
Why Is ROE Important For 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.
Topaz Energy's Earnings Growth And 3.8% ROE
It is hard to argue that Topaz Energy's ROE is much good in and of itself. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Topaz Energy grew its net income at a significant rate of 48% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then performed a comparison between Topaz Energy's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 41% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. 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 Topaz Energy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Topaz Energy Efficiently Re-investing Its Profits?
Topaz Energy has very a high three-year median payout ratio of 305% suggesting that the company's shareholders are getting paid from more than just the company's earnings. Despite this, the company's earnings grew significantly as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. To know the 2 risks we have identified for Topaz Energy visit our risks dashboard for free.
Moreover, Topaz Energy is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 253% of its profits over the next three years. Still, forecasts suggest that Topaz Energy's future ROE will rise to 5.0% even though the the company's payout ratio is not expected to change by much.
Conclusion
Overall, we have mixed feelings about Topaz Energy. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
