Tamarack Valley Energy Ltd.'s (TSE:TVE) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Tamarack Valley Energy (TSE:TVE) has had a great run on the share market with its stock up by a significant 21% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Tamarack Valley Energy's ROE in this article.

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.

View our latest analysis for Tamarack Valley Energy

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 Tamarack Valley Energy is:

9.7% = CA$213m ÷ CA$2.2b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Tamarack Valley Energy's Earnings Growth And 9.7% ROE

On the face of it, Tamarack Valley Energy's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 11%, we may spare it some thought. Looking at Tamarack Valley Energy's exceptional 37% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing Tamarack Valley 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 38% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Tamarack Valley Energy fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tamarack Valley Energy Using Its Retained Earnings Effectively?

Tamarack Valley Energy's three-year median payout ratio is a pretty moderate 36%, meaning the company retains 64% of its income. By the looks of it, the dividend is well covered and Tamarack Valley Energy is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Tamarack Valley Energy has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we feel that Tamarack Valley Energy certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings 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.