Are Strong Financial Prospects The Force That Is Driving The Momentum In Trican Well Service Ltd.'s TSE:TCW) Stock?

Trican Well Service (TSE:TCW) has had a great run on the share market with its stock up by a significant 13% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Trican Well Service's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Trican Well Service

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Trican Well Service is:

23% = CA$111m ÷ CA$485m (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.23 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Trican Well Service's Earnings Growth And 23% ROE

Firstly, we acknowledge that Trican Well Service has a significantly high ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. As a result, Trican Well Service's exceptional 70% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Trican Well Service's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 56% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 TCW? You can find out in our latest intrinsic value infographic research report.

Is Trican Well Service Efficiently Re-investing Its Profits?

Trican Well Service's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. So it seems that Trican Well Service is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Trican Well Service 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 27%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 20%.

Summary

Overall, we are quite pleased with Trican Well Service's performance. 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. 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.