Declining Stock and Decent Financials: Is The Market Wrong About GFL Environmental Inc. (TSE:GFL)?

With its stock down 6.0% over the past three months, it is easy to disregard GFL Environmental (TSE:GFL). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to GFL Environmental's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for GFL Environmental is:

1.5% = CA$117m ÷ CA$7.8b (Based on the trailing twelve months to September 2025).

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$0.01.

Check out our latest analysis for GFL Environmental

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of GFL Environmental's Earnings Growth And 1.5% ROE

It is quite clear that GFL Environmental's ROE is rather low. Even when compared to the industry average of 9.1%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that GFL Environmental grew its net income at a significant rate of 24% in the last five years. Therefore, there could be other reasons behind this 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.

As a next step, we compared GFL Environmental's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.9%.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for GFL? You can find out in our latest intrinsic value infographic research report.

Is GFL Environmental Efficiently Re-investing Its Profits?

GFL Environmental's LTM (or last twelve month) payout ratio to shareholders is 20%, which is quite low. This implies that the company is retaining 80% of its profits. So it looks like GFL Environmental is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, GFL Environmental is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 4.8% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 6.9%, over the same period.

Conclusion

Overall, we feel that GFL Environmental certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.