Is Birchcliff Energy Ltd.'s (TSE:BIR) Stock's Recent Performance A Reflection Of Its Financial Health?

Simply Wall St · 09/15/2023 12:59

Birchcliff Energy's (TSE:BIR) stock is up by 6.4% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Birchcliff Energy's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Birchcliff Energy

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Birchcliff Energy is:

14% = CA$315m ÷ CA$2.3b (Based on the trailing twelve months to June 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Birchcliff Energy's Earnings Growth And 14% ROE

At first glance, Birchcliff Energy seems to have a decent ROE. Even so, when compared with the average industry ROE of 20%, we aren't very excited. However, we are pleased to see the impressive 56% net income growth reported by Birchcliff Energy over the past five years. Therefore, there could be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.

As a next step, we compared Birchcliff Energy's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 41%.

past-earnings-growth
TSX:BIR Past Earnings Growth September 15th 2023

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is BIR fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Birchcliff Energy Efficiently Re-investing Its Profits?

Birchcliff Energy's three-year median payout ratio to shareholders is 2.2%, which is quite low. This implies that the company is retaining 98% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, Birchcliff Energy has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 75% over the next three years.

Conclusion

In total, we are pretty happy with Birchcliff Energy's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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 influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 3 risks we have identified for Birchcliff Energy visit our risks dashboard for free.