ARC Resources (TSE:ARX) stock is up 44% in the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In particular, we’ll be paying attention to ARC Resources’ ROE today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for ARC Resources
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for ARC Resources is:
13% = CAD 787 million ÷ CAD 5.9 billion (based on trailing 12 months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every Canadian dollar of share capital it has, the company has made a profit of 0.13 Canadian dollars.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
ARC Resources earnings growth and 13% ROE
At first glance, ARC Resources appears to have a decent ROE. Still, the fact that the company’s ROE is 20% below the industry average tempers our expectations. Other research shows that ARC Resources’ net income has declined by 25% over the past five years. Not to mention that the company has a high ROE to start with, just that it’s below the industry average. Therefore, the decline in earnings could be the result of other factors. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.
However, when we compared the growth of ARC Resources with the industry, we found that although the company’s earnings declined, the industry experienced earnings growth of 8.9% over the course of the year. the same period. It’s quite worrying.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. What is ARX worth today? The intrinsic value infographic in our free research report helps visualize whether ARX is currently being mispriced by the market.
Does ARC Resources effectively reinvest its profits?
Despite a normal three-year median payout ratio of 45% (where it keeps 55% of its earnings), ARC Resources has seen declining earnings, as seen above. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.
Moreover, ARC Resources has been paying dividends for at least a decade, suggesting that management must have perceived that shareholders preferred dividends to earnings growth. Existing analyst estimates suggest the company’s future payout ratio is expected to drop to 27% over the next three years.
Overall, we think ARC Resources certainly has some positive factors to consider. Still, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.