Power Corporation of Canada (TSE:POW) fundamentals look pretty solid: Could the market be wrong about the stock?
It’s hard to get excited after looking at the recent performance of Power Corporation of Canada (TSE:POW), as its stock is down 3.7% in the past month. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. Specifically, we’ll be paying attention to Power Corporation of Canada’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Power Corporation of Canada
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, according to the formula above, the ROE of Power Corporation of Canada is:
11% = CAD 4.7 billion ÷ CAD 43 billion (based on trailing 12 months to September 2021).
The “return” is the annual profit. This therefore means that for every C$1 of investment by its shareholder, the company generates a profit of C$0.11.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Power Corporation of Canada earnings growth and ROE of 11%
At first glance, Power Corporation of Canada appears to have a decent ROE. Even when compared to the industry average of 13%, the company’s ROE looks pretty decent. This likely partly explains Power Corporation of Canada’s moderate growth of 15% over the past five years, among other factors.
Then, comparing Power Corporation of Canada’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 15% over the same period. .
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. What is POW worth today? The intrinsic value infographic in our free research report visualizes whether the POW is currently being mispriced by the market.
Does Power Corporation of Canada effectively reinvest its profits?
Although Power Corporation of Canada has a three-year median payout ratio of 61% (meaning it retains 39% of earnings), the company has still experienced good earnings growth in the past, which which means that its high payout ratio hasn’t hampered its ability to grow.
In fact, Power Corporation of Canada has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 61%. As a result, Power Corporation of Canada’s ROE is not expected to change much either, which we have inferred from analysts’ estimate of 12% for future ROE.
Overall, we are quite satisfied with the performance of Power Corporation of Canada. We are particularly impressed with the company’s tremendous earnings growth, which was likely supported by its high ROE. Although the company pays most of its profits in the form of dividends, it was able to increase its profits despite this, so this is probably a good sign. That said, in studying the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.