Should the weakness of Western Forest Products Inc. (TSE: WEF) shares be taken as a sign that the market will correct the share price given decent financial data?

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With its inventory down 8.1% over the past week, it’s easy to overlook Western Forest Products (TSE: WEF). But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. In this article, we have decided to focus on the RCP of Western Forest Products.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.

See our latest analysis for western forest products

How is the ROE calculated?

The return on equity formula is:

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

Thus, according to the above formula, the RCP of Western Forest Products is:

29% = C $ 178 million ÷ C $ 618 million (based on the last twelve months to June 2021).

The “return” is the profit of the last twelve months. One way to conceptualize this is that for every C $ 1 of shareholder capital it has, the company has made C $ 0.29 in profit.

What is the relationship between ROE and profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of ​​the growth potential of the business. Assuming everything is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics. .

Western Forest Products and RCP profit growth of 29%

For starters, Western Forest Products has a pretty high ROE, which is interesting. Even compared to the industry average of 24%, the company’s ROE is pretty decent. Needless to say, we are quite surprised to see that Western Forest Products’ net income has declined at a rate of 18% over the past five years despite its decent level. So there could be other aspects that could explain this. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.

That being said, we compared Western Forest Products’ performance to that of the industry and we were concerned when we found that while the company cut profits, the industry increased profits at a rate. by 9.0% over the same period.

TSX: WEF Past Earnings Growth September 17, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. What is WEF worth today? The intrinsic value infographic in our free research report helps to visualize whether WEF is currently being poorly valued by the market.

Are Western Forest Products Efficiently Reinvesting Profits?

Western Forest Products’ low three-year median payout ratio of 4.2% (or 96% retention rate) over the past three years should mean the company is keeping most of its profits to fuel growth. , but the company’s profits actually declined. This should generally not be the case when a business keeps most of its profits. So there could be other explanations in this regard. For example, the business of the company can deteriorate.

In addition, Western Forest Products paid dividends over an eight-year period, suggesting that maintaining dividend payments is preferred by management, even when earnings are declining. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to increase to 20% over the next three years.

Conclusion

Overall, we think Western Forest Products certainly has some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to show strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. Additionally, the latest forecast from industry analysts shows that analysts expect the company’s profits to continue declining in the future. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Just Wall Street does not have a position in the stocks mentioned.
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