Is Brookfield Renewable Corporation's (TSE:BEPC) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Brookfield Renewable (TSE:BEPC) has had a great run on the share market with its stock up by a significant 25% over the last 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 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Brookfield Renewable

How To Calculate Return On Equity?

Return on equity 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 Brookfield Renewable is:

11% = US$1.7b ÷ US$16b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.11 in profit.

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 Brookfield Renewable's Earnings Growth And 11% ROE

To start with, Brookfield Renewable's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. Consequently, this likely laid the ground for the impressive net income growth of 36% seen over the past five years by Brookfield Renewable. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Brookfield Renewable's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 36% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is BEPC fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Brookfield Renewable Using Its Retained Earnings Effectively?

Brookfield Renewable has a three-year median payout ratio of 33% (where it is retaining 67% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Brookfield Renewable is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Brookfield Renewable has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Brookfield Renewable's performance. 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. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com