Most readers would already be aware that Crescent Point Energy's (TSE:CPG) stock increased significantly by 28% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Crescent Point Energy's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You Calculate Return On Equity?
Return on equity 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 Crescent Point Energy is:
5.9% = CA$397m ÷ CA$6.7b (Based on the trailing twelve months to June 2023).
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$0.06 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.
Crescent Point Energy's Earnings Growth And 5.9% ROE
On the face of it, Crescent Point Energy's ROE is not much to talk about. Next, when compared to the average industry ROE of 20%, the company's ROE leaves us feeling even less enthusiastic. Despite this, surprisingly, Crescent Point Energy saw an exceptional 48% net income growth over the past five years. So, there might 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 Crescent Point Energy's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 41% over the last few years.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Crescent Point Energy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Crescent Point Energy Making Efficient Use Of Its Profits?
Crescent Point Energy's ' three-year median payout ratio is on the lower side at 0.9% implying that it is retaining a higher percentage (99%) of its profits. So it looks like Crescent Point Energy is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, Crescent Point Energy has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
In total, it does look like Crescent Point Energy has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 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.
Crescent Point Energy
Crescent Point Energy Corp. explores, develops, and produces light and medium crude oil, natural gas liquids, and natural gas reserves in Western Canada and the United States.
Mediocre balance sheet second-rate dividend payer.