However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. Overall, we feel that Whitecap Resources certainly does have some positive factors to consider. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 21% over the next three years. In addition, Whitecap Resources has been paying dividends over a period of nine years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline. For example, the business could be in decline. It looks like there might be some other reasons to explain the lack in that respect. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. Whitecap Resources' low three-year median payout ratio of 14% (implying that it retains the remaining 86% of its profits) comes as a surprise when you pair it with the shrinking earnings. Is Whitecap Resources Using Its Retained Earnings Effectively? Is WCP fairly valued? This infographic on the company's intrinsic value has everything you need to know. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.Įarnings growth is an important metric to consider when valuing a stock. So, there might be some other aspects that could explain this. For this reason, Whitecap Resources' five year net income decline of 3.4% raises the question as to why the high ROE didn't translate into earnings growth. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. Whitecap Resources' Earnings Growth And 48% ROEįirst thing first, we like that Whitecap Resources has an impressive ROE. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features. 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. Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Why Is ROE Important For Earnings Growth? Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.48 in profit. The 'return' is the amount earned after tax over the last twelve months. So, based on the above formula, the ROE for Whitecap Resources is:Ĥ8% = CA$1.8b ÷ CA$3.7b (Based on the trailing twelve months to December 2021). Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity ROE can be calculated by using the formula: See our latest analysis for Whitecap Resources How Do You Calculate Return On Equity? In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders. Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Particularly, we will be paying attention to Whitecap Resources' ROE today. 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. Whitecap Resources' (TSE:WCP) stock is up by a considerable 37% over the past three months.
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