Enwell Energy plc's (LON:ENW) Stock Is Going Strong: Have Financials A Role To Play?

By
Simply Wall St
Published
December 05, 2020
AIM:ENW

Most readers would already be aware that Enwell Energy's (LON:ENW) stock increased significantly by 51% 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 Enwell Energy's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Enwell Energy

How Do You Calculate Return On Equity?

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 Enwell Energy is:

2.8% = US$3.5m ÷ US$128m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Enwell Energy's Earnings Growth And 2.8% ROE

It is quite clear that Enwell Energy's ROE is rather low. Even compared to the average industry ROE of 6.0%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Enwell Energy grew its net income at a significant rate of 45% in the last five years. Therefore, there could be other reasons behind this growth. 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.

Next, on comparing with the industry net income growth, we found that Enwell Energy's growth is quite high when compared to the industry average growth of 32% in the same period, which is great to see.

past-earnings-growth
AIM:ENW Past Earnings Growth December 5th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Enwell Energy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Enwell Energy Making Efficient Use Of Its Profits?

Summary

In total, it does look like Enwell Energy has some positive aspects to its business. 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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