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editorial-team@simplywallst.com (Simply Wall St)
4 min read
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WSP Global (TSE:WSP) has had a rough three months with its share price down 9.0%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to WSP Global’s ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.
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 WSP Global is:
8.2% = CA$681m ÷ CA$8.3b (Based on the trailing twelve months to December 2024).
The ‘return’ is the yearly profit. That means that for every CA$1 worth of shareholders’ equity, the company generated CA$0.08 in profit.
Check out our latest analysis for WSP Global
So far, we’ve learned that ROE is a measure of a company’s profitability. 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, WSP Global’s ROE is not much to talk about. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 12% either. Although, we can see that WSP Global saw a modest net income growth of 19% over the past five years. So, the growth in the company’s earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.
We then performed a comparison between WSP Global’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 17% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if WSP Global is trading on a high P/E or a low P/E , relative to its industry.
