Orca Energy Group Inc.'s (CVE:ORC.B) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Orca Energy Group (CVE:ORC.B) has had a rough month with its share price down 4.6%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Orca Energy Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Orca Energy Group

How To 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 Orca Energy Group is:

40% = US$34m ÷ US$86m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.40.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Orca Energy Group's Earnings Growth And 40% ROE

Firstly, we acknowledge that Orca Energy Group has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.0% which is quite remarkable. Under the circumstances, Orca Energy Group's considerable five year net income growth of 66% was to be expected.

As a next step, we compared Orca Energy Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 39%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Orca Energy Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Orca Energy Group Efficiently Re-investing Its Profits?

Orca Energy Group's ' three-year median payout ratio is on the lower side at 18% implying that it is retaining a higher percentage (82%) of its profits. So it looks like Orca Energy Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.

While Orca Energy Group has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

Overall, we are quite pleased with Orca Energy Group'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 3 risks we have identified for Orca Energy Group by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. 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.
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