Polaris Infrastructure Inc.'s (TSE:PIF) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Polaris Infrastructure's (TSE:PIF) stock is up by a considerable 67% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Polaris Infrastructure's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Polaris Infrastructure

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Polaris Infrastructure is:

9.8% = US$20m ÷ US$205m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.10.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Polaris Infrastructure's Earnings Growth And 9.8% ROE

At first glance, Polaris Infrastructure seems to have a decent ROE. Even when compared to the industry average of 8.4% the company's ROE looks quite decent. This certainly adds some context to Polaris Infrastructure's exceptional 78% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Polaris Infrastructure'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 22%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Polaris Infrastructure's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Polaris Infrastructure Using Its Retained Earnings Effectively?

The really high three-year median payout ratio of 103% for Polaris Infrastructure suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. Our risks dashboard should have the 4 risks we have identified for Polaris Infrastructure.

Additionally, Polaris Infrastructure has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 71% over the next three years.

Summary

In total, it does look like Polaris Infrastructure has some positive aspects to its business. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. 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. 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.
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