Alvopetro Energy (CVE:ALV) has had a rough month with its share price down 7.3%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Alvopetro Energy’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. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
View our latest analysis for Alvopetro 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 Alvopetro Energy is:
24% = US$21m ÷ US$88m (Based on the trailing twelve months to March 2024).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.24 in profit.
What Has ROE Got To Do With Earnings Growth?
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.
Alvopetro Energy’s Earnings Growth And 24% ROE
Firstly, we acknowledge that Alvopetro Energy has a significantly high ROE. Secondly, even when compared to the industry average of 10% the company’s ROE is quite impressive. Under the circumstances, Alvopetro Energy’s considerable five year net income growth of 59% was to be expected.
As a next step, we compared Alvopetro Energy’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 39%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Alvopetro Energy’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Alvopetro Energy Efficiently Re-investing Its Profits?
Alvopetro Energy’s three-year median payout ratio is a pretty moderate 46%, meaning the company retains 54% of its income. So it seems that Alvopetro Energy is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.
Besides, Alvopetro Energy has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.
Conclusion
On the whole, we feel that Alvopetro Energy’s performance has been quite good. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for Alvopetro Energy by visiting our risks dashboard for free on our platform here.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
