Are Robust Financials Driving The Recent Rally In PetroTal Corp.'s (TSE:TAL) Stock?

Most readers would already be aware that PetroTal's (TSE:TAL) stock increased significantly by 13% over the past week. 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. In this article, we decided to focus on PetroTal's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for PetroTal

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for PetroTal is:

22% = US$103m ÷ US$462m (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.22 in profit.

Why Is ROE Important For 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. 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.

A Side By Side comparison of PetroTal's Earnings Growth And 22% ROE

Firstly, we acknowledge that PetroTal has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. As a result, PetroTal's exceptional 67% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that PetroTal's growth is quite high when compared to the industry average growth of 43% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is PetroTal fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is PetroTal Efficiently Re-investing Its Profits?

Until recently management had been reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

PetroTal has re-commenced dividend payments, indicating the company is looking to share profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to reach 52% over the next three years.

Conclusion

In total, we are pretty happy with PetroTal's 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, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.