Yahoo Finance Empire Company Limited's (TSE:EMP.A) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?
It is hard to get excited after looking at Empire's (TSE:EMP.A) recent performance, when its stock has declined 9.7% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Empire's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Empire
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 Empire is:
16% = CA$811m ÷ CA$5.1b (Based on the trailing twelve months to May 2022).
The 'return' is the profit over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.16 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Empire's Earnings Growth And 16% ROE
At first glance, Empire seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 15%. Consequently, this likely laid the ground for the impressive net income growth of 33% seen over the past five years by Empire. We believe that there might also 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 Empire'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 18%.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Empire's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Empire Making Efficient Use Of Its Profits?
Empire's ' three-year median payout ratio is on the lower side at 21% implying that it is retaining a higher percentage (79%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Moreover, Empire is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Summary
Overall, we are quite pleased with Empire's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings.
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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.
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