Is Canaf Investments Inc.'s(CVE:CAF) Recent Stock Performance Tethered To Its Strong Fundamentals?

By
Simply Wall St
Published
August 10, 2021
TSXV:CAF
Source: Shutterstock

Most readers would already be aware that Canaf Investments' (CVE:CAF) stock increased significantly by 23% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Canaf Investments' ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Canaf Investments

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Canaf Investments is:

20% = US$1.1m ÷ US$5.3m (Based on the trailing twelve months to April 2021).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.20 in profit.

Why Is ROE Important For 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. 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.

Canaf Investments' Earnings Growth And 20% ROE

At first glance, Canaf Investments seems to have a decent ROE. On comparing with the average industry ROE of 16% the company's ROE looks pretty remarkable. This probably laid the ground for Canaf Investments' significant 29% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing Canaf Investments' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 29% in the same period.

past-earnings-growth
TSXV:CAF Past Earnings Growth August 11th 2021

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 Canaf Investments''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Canaf Investments Making Efficient Use Of Its Profits?

Conclusion

On the whole, we feel that Canaf Investments' performance has been quite good. 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 sizeable growth in its earnings. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 2 risks we have identified for Canaf Investments.

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