Most readers would already know that Sempra’s (NYSE:SRE) stock increased by 6.2% 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. Specifically, we decided to study Sempra’s ROE in this article.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Sempra
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 Sempra is:
9.4% = US$3.4b ÷ US$36b (Based on the trailing twelve months to September 2024).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.09.
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. 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.
At first glance, Sempra’s ROE doesn’t look very promising. However, its ROE is similar to the industry average of 9.2%, so we won’t completely dismiss the company. Having said that, Sempra has shown a modest net income growth of 11% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as – high earnings retention or an efficient management in place.
As a next step, we compared Sempra’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 7.6%.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for SRE? You can find out in our latest intrinsic value infographic research report.
