Is Canfor Corporation's (TSE:CFP) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
November 28, 2021
TSX:CFP
Source: Shutterstock

Canfor (TSE:CFP) has had a great run on the share market with its stock up by a significant 6.6% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Canfor's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Canfor

How Do You 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 Canfor is:

45% = CA$1.8b ÷ CA$4.1b (Based on the trailing twelve months to September 2021).

The 'return' is the yearly profit. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.45 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Canfor's Earnings Growth And 45% ROE

First thing first, we like that Canfor has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 28% also doesn't go unnoticed by us. So, the substantial 34% net income growth seen by Canfor over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Canfor's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

past-earnings-growth
TSX:CFP Past Earnings Growth November 29th 2021

Earnings growth is an important metric to consider when valuing a stock. 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. Is Canfor fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Canfor Making Efficient Use Of Its Profits?

Given that Canfor doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

Overall, we are quite pleased with Canfor'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. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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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