Contact Energy’s (NZSE:CEN) stock up by 1.9% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Contact 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
See our latest analysis for Contact Energy
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 Contact Energy is:
9.0% = NZ$235m ÷ NZ$2.6b (Based on the trailing twelve months to June 2024).
The ‘return’ refers to a company’s earnings over the last year. That means that for every NZ$1 worth of shareholders’ equity, the company generated NZ$0.09 in profit.
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
On the face of it, Contact Energy’s ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 7.5% doesn’t go unnoticed by us. This probably goes some way in explaining Contact Energy’s moderate 5.0% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
Next, on comparing Contact Energy’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 6.1% over the last few years.
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. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Contact Energy’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
