Are Strong Financial Prospects The Force That Is Driving The Momentum In Empire Company Limited's TSE:EMP.A) Stock?

Simply Wall St · 09/15/2023 10:46

Most readers would already be aware that Empire's (TSE:EMP.A) stock increased significantly by 5.3% over the past week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Empire's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Empire

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 Empire is:

14% = CA$728m ÷ CA$5.3b (Based on the trailing twelve months to May 2023).

The 'return' is the profit over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.14 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Empire's Earnings Growth And 14% ROE

To begin with, Empire seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. Consequently, this likely laid the ground for the decent growth of 20% seen over the past five years by Empire.

As a next step, we compared Empire's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 17% in the same period.

past-earnings-growth
TSX:EMP.A Past Earnings Growth September 15th 2023

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Empire fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Empire Using Its Retained Earnings Effectively?

Empire has a low three-year median payout ratio of 21%, meaning that the company retains the remaining 79% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Empire has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Empire's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth.