Are Strong Financial Prospects The Force That Is Driving The Momentum In CES Energy Solutions Corp.'s TSE:CEU) Stock?

CES Energy Solutions (TSE:CEU) has had a great run on the share market with its stock up by a significant 11% over the last 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. Specifically, we decided to study CES Energy Solutions' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for CES Energy Solutions

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 CES Energy Solutions is:

25% = CA$190m ÷ CA$762m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.25 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

CES Energy Solutions' Earnings Growth And 25% ROE

To begin with, CES Energy Solutions has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 16% also doesn't go unnoticed by us. As a result, CES Energy Solutions' exceptional 54% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared CES Energy Solutions' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 54% 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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for CEU? You can find out in our latest intrinsic value infographic research report.

Is CES Energy Solutions Using Its Retained Earnings Effectively?

CES Energy Solutions' ' three-year median payout ratio is on the lower side at 16% implying that it is retaining a higher percentage (84%) of its profits. So it looks like CES Energy Solutions is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, CES Energy 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 11% over the next three years. However, CES Energy Solutions' future ROE is expected to decline to 17% despite the expected decline in its payout ratio. We infer that there could be other factors that could be steering the foreseen decline in the company's ROE.

Summary

Overall, we are quite pleased with CES Energy Solutions' performance. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.