Brookfield Renewable Corporation's (TSE:BEPC) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 4.8% over the past week, it is easy to disregard Brookfield Renewable (TSE:BEPC). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Brookfield Renewable's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Brookfield Renewable

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Brookfield Renewable is:

6.9% = US$1.0b ÷ US$15b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 Brookfield Renewable's Earnings Growth And 6.9% ROE

At first glance, Brookfield Renewable's ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.7%, so we won't completely dismiss the company. Looking at Brookfield Renewable's exceptional 40% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Brookfield Renewable's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 42% in the same 5-year period.

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 Brookfield Renewable fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Brookfield Renewable Using Its Retained Earnings Effectively?

Brookfield Renewable has a three-year median payout ratio of 34% (where it is retaining 66% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Brookfield Renewable is reinvesting its earnings efficiently.

Moreover, Brookfield Renewable is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Summary

On the whole, we do feel that Brookfield Renewable has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.