Is the weakness in Circa Enterprises Inc. (CVE:CTO) shares a sign that the market could be wrong given its strong financial outlook?

It’s hard to get excited after looking at the recent performance of Circa Enterprises (CVE:CTO), when its shares fell 10% over the last month. However, stock prices are typically driven by a company’s long-term financial performance, which in this case looks quite promising. Specifically, we decided to study Circa Enterprises’ ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to the shareholders’ equity.

See our latest analysis of Circa Enterprises

How is return on capital calculated?

ROE can be calculated using the formula:

Return on equity = Net profit (from continuing operations) ÷ Shareholders’ equity

So, based on the above formula, Circa Enterprises’ ROE is:

11% = CA$1.7 million ÷ CA$15 million (based on the last twelve months through September 2022).

‘Performance’ refers to a company’s earnings over the past year. One way to conceptualize this is that for every CA$1 of shareholder equity it has, the company made CA$0.11 in profit.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE is a measure of a company’s profitability. Based on how much of its earnings the business chooses to reinvest or “hold,” we can assess a business’s future ability to generate earnings. Generally speaking, other things being equal, companies with a high return on capital and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Circa Enterprises earnings growth and 11% ROE

For starters, Circa Enterprises’ ROE seems acceptable. Even when compared to the industry average of 13%, the company’s ROE looks pretty decent. This probably explains in some way the moderate growth of 14% of Circa Enterprises in the last five years, among other factors.

We then compared Circa Enterprises’ net income growth to the industry and found that the company’s growth figure is below the industry average growth rate of 20% over the same period, which is a bit worrying.

past earnings growth

The basis for giving value to a company is, to a large extent, linked to the growth of its profits. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already built into the stock price. Doing so will help them determine whether the stock future looks rosy or ominous. If you’re wondering about Circa Enterprises’ valuation, check out this gauge of its price-earnings ratio, compared to its industry.

Is Circa Enterprises efficiently reinvesting its profits?

Circa Enterprises’ three-year median payout ratio to shareholders is 23% (implying it retains 77% of its revenue), which is on the lower side, so it appears management is reinvesting heavily earnings to grow your business.

In addition, Circa Enterprises is determined to continue to share its earnings with shareholders, which we infer from its long, seven-year history of paying dividends.

conclusion

Overall, we are very happy with the performance of Circa Enterprises. Specifically, we like that the company is reinvesting a large portion of its earnings at a high rate of return. This, of course, has caused the company to see good growth in 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 influences share prices over the long term. Let’s not forget, business risk is also one of the factors that affects the share price. Therefore, this is also an important area that investors should pay attention to before making a decision on any business. You can view the 2 risks we have identified for Circa Enterprises by visiting our risk dashboard free on our platform here.

Do you have comments on this article? Worried about the content? Get in touch with us directly. Alternatively, email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide feedback based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St does not have a position in any of the mentioned stocks.

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