Enwell Energy (LON: ENW) shares have risen 54% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . Specifically, we have decided to study the ROE of Enwell Energy in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for Enwell Energy
How to calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Enwell Energy is:
2.5% = US $ 3.2 million ÷ US $ 126 million (based on the last twelve months up to December 2020).
“Return” refers to a company’s profits over the past year. So this means that for every £ 1 invested by its shareholder, the company generates a profit of £ 0.03.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Enwell Energy profit growth and 2.5% ROE
It’s pretty clear that Enwell Energy’s ROE is rather low. Not only that, even compared to the industry average of 10%, the company’s ROE is quite unremarkable. However, we are pleasantly surprised to see that Enwell Energy has increased its bottom line at a significant rate of 25% over the past five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
As a next step, we compared Enwell Energy’s net income growth with the industry and luckily we found that the growth observed by the company is above the industry average growth of 17%.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. If you’re wondering about Enwell Energy’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is Enwell Energy Efficiently Reinvesting Its Profits?
Overall, we think Enwell Energy has some positive attributes. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. To know the 2 risks that we have identified for Enwell Energy, visit our risk dashboard free of charge.
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