Is Winpak Ltd.'s (TSE:WPK) Recent Stock Performance Tethered To Its Strong Fundamentals?

Winpak's (TSE:WPK) stock is up by a considerable 13% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Winpak's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

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 Winpak is:

11% = US$150m ÷ US$1.3b (Based on the trailing twelve months to March 2025).

The 'return' is the profit over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.11 in profit.

View our latest analysis for Winpak

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Winpak's Earnings Growth And 11% ROE

At first glance, Winpak seems to have a decent ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. This certainly adds some context to Winpak's moderate 8.8% net income growth seen over the past five years.

As a next step, we compared Winpak'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 1.2%.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is WPK fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Winpak Efficiently Re-investing Its Profits?

In Winpak's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 4.3% (or a retention ratio of 96%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Winpak 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.

Conclusion

On the whole, we feel that Winpak's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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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.