Yahoo Finance Are Robust Financials Driving The Recent Rally In Crescent Point Energy Corp.'s (TSE:CPG) Stock?
Crescent Point Energy (TSE:CPG) has had a great run on the share market with its stock up by a significant 21% over the last week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Crescent Point Energy'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.
Check out our latest analysis for Crescent Point Energy
How Is ROE Calculated?
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 Crescent Point Energy is:
25% = CA$1.7b ÷ CA$6.8b (Based on the trailing twelve months to June 2022).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.25 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.
Crescent Point Energy's Earnings Growth And 25% ROE
Firstly, we acknowledge that Crescent Point Energy has a significantly high ROE. Further, even comparing with the industry average if 24%, the company's ROE is quite respectable. Given the circumstances, the significant 30% net income growth seen by Crescent Point Energy over the last five years is not surprising.
We then performed a comparison between Crescent Point Energy's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 26% in the same 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is CPG worth today? The intrinsic value infographic in our free research report helps visualize whether CPG is currently mispriced by the market.
Is Crescent Point Energy Efficiently Re-investing Its Profits?
Crescent Point Energy's LTM (or last twelve month) payout ratio to shareholders is 4.8%, which is quite low. This implies that the company is retaining 95% of its profits. So it looks like Crescent Point Energy is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Crescent Point Energy 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.
Conclusion
Overall, we are quite pleased with Crescent Point Energy'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. 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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
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