Baytex Energy Corp. (TSE:BTE) on an Uptrend: Could Fundamentals Boost Momentum?

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Baytex Energy (TSE:BTE) stock is up 26% over the past month. 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. Specifically, we decided to study the ROE of Baytex Energy in this article.

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 simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for Baytex Energy

How is ROE calculated?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, Baytex Energy’s ROE is:

77% = CAD$1.3 billion ÷ CAD$1.7 billion (based on trailing 12 months to September 2021).

The “yield” is the profit of the last twelve months. Another way to think about this is that for every CA$1 of equity, the company was able to make a profit of CA$0.77.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Based on the share 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. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Growth in Baytex Energy earnings and 77% ROE

First, we recognize that Baytex Energy has a significantly high ROE. Second, a comparison to the average industry-reported ROE of 16% also does not go unnoticed for us. As you might expect, the 11% drop in net profit reported by Baytex Energy does not bode well for us. So there could be other aspects that could explain this. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.

That being said, we benchmarked Baytex Energy’s performance against the industry and were concerned when we found that although the company reduced profits, the industry increased profits at a rate of 5, 0% over the same period.

TSX: BTE Prior Earnings Growth January 16, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Baytex Energy’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Is Baytex Energy using its profits efficiently?

Baytex Energy pays no dividends, which means that potentially all of its profits are reinvested in the company, which does not explain why the company’s profits have decreased if it retains all of its profits. So there could be other explanations for this. For example, the company’s business may deteriorate.

Conclusion

All in all, it looks like Baytex Energy has some positive aspects to its business. However, we are disappointed to see a lack of earnings growth, even despite a high ROE and high reinvestment rate. We believe there could be external factors that could negatively impact the business. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. You can see the 3 risks we have identified for Baytex Energy by visiting our risk dashboard for free on our platform here.

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.

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