Has Grey Wolf Animal Health Corp.'s (CVE:WOLF) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Grey Wolf Animal Health's (CVE:WOLF) stock increased significantly by 60% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Grey Wolf Animal Health'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Grey Wolf Animal Health

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 Grey Wolf Animal Health is:

2.7% = CA$702k ÷ CA$26m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.03 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. 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.

Grey Wolf Animal Health's Earnings Growth And 2.7% ROE

It is quite clear that Grey Wolf Animal Health's ROE is rather low. Even when compared to the industry average of 20%, the ROE figure is pretty disappointing. In spite of this, Grey Wolf Animal Health was able to grow its net income considerably, at a rate of 57% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Grey Wolf Animal Health'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 46%.

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 Grey Wolf Animal Health fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Grey Wolf Animal Health Using Its Retained Earnings Effectively?

Given that Grey Wolf Animal Health doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we feel that Grey Wolf Animal Health certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Grey Wolf Animal Health 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. 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.