Is Weakness In Hammond Power Solutions Inc. (TSE:HPS.A) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Hammond Power Solutions (TSE:HPS.A) has had a rough month with its share price down 14%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Hammond Power Solutions' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Do You 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 Hammond Power Solutions is:

24% = CA$80m ÷ CA$326m (Based on the trailing twelve months to June 2025).

The 'return' refers to a company's earnings over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.24 in profit.

Check out our latest analysis for Hammond Power Solutions

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Hammond Power Solutions' Earnings Growth And 24% ROE

Firstly, we acknowledge that Hammond Power Solutions has a significantly high ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. Under the circumstances, Hammond Power Solutions' considerable five year net income growth of 38% was to be expected.

Next, on comparing with the industry net income growth, we found that Hammond Power Solutions' growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Hammond Power Solutions fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hammond Power Solutions Making Efficient Use Of Its Profits?

Hammond Power Solutions' ' three-year median payout ratio is on the lower side at 13% implying that it is retaining a higher percentage (87%) of its profits. So it looks like Hammond Power Solutions is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Hammond Power Solutions is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we feel that Hammond Power Solutions' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.