Stock Analysis

Will Weakness in Vermilion Energy Inc.'s (TSE:VET) Stock Prove Temporary Given Strong Fundamentals?

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TSX:VET
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Vermilion Energy (TSE:VET) has had a rough month with its share price down 30%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Vermilion Energy's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Vermilion Energy

How To Calculate Return On Equity?

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 Vermilion Energy is:

31% = CA$844m ÷ CA$2.7b (Based on the trailing twelve months to June 2022).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.31.

Why Is ROE Important For 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. 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.

Vermilion Energy's Earnings Growth And 31% ROE

First thing first, we like that Vermilion Energy has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 24% which is quite remarkable. This probably laid the groundwork for Vermilion Energy's moderate 17% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Vermilion Energy's reported growth was lower than the industry growth of 26% in the same period, which is not something we like to see.

past-earnings-growth
TSX:VET Past Earnings Growth September 26th 2022

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Vermilion Energy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Vermilion Energy Making Efficient Use Of Its Profits?

Vermilion Energy's LTM (or last twelve month) payout ratio to shareholders is 2.3% (implying that it retains 98% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Vermilion 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 3.3% over the next three years.

Conclusion

Overall, we are quite pleased with Vermilion Energy's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Valuation is complex, but we're helping make it simple.

Find out whether Vermilion Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About TSX:VET

Vermilion Energy

Vermilion Energy Inc., together with its subsidiaries, engages in the acquisition, exploration, development, and production of petroleum and natural gas in North America, Europe, and Australia.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation6
Future Growth0
Past Performance4
Financial Health3
Dividends2

Read more about these checks in the individual report sections or in our analysis model.

Very undervalued with proven track record.