The impressive stock market performance of MEG Energy Corp. (TSE: MEG) have something to do with its fundamentals?

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MEG Energy (TSE: MEG) shares have risen 32% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . Specifically, we have decided to study the ROE of MEG Energy in this article.

Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how effectively their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.

Check out our latest review for MEG Energy

How to calculate return on equity?

Return on equity can be calculated using the formula:

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

Thus, based on the above formula, the ROE of MEG Energy is:

3.3% = 121 million Canadian dollars ÷ 3.6 billion Canadian dollars (based on the last twelve months to September 2021).

The “return” is the amount earned after tax over the past twelve months. This therefore means that for every CA $ 1 invested by its shareholder, the company generates a profit of CA $ 0.03.

Why is ROE important for profit growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

MEG Energy profit growth and 3.3% ROE

It is difficult to say that the ROE of MEG Energy is very good on its own. Not only that, even compared to the industry average of 16%, the company’s ROE is quite unremarkable. Still, MEG Energy has achieved decent net income growth of 13% over the past five years. We think there might be other factors at play here. Such as – high profit retention or effective management in place.

In a next step, we compared MEG Energy’s net income growth with the industry and luckily we found that the growth observed by the company is above the industry average growth of 5.0%. .

TSX: MEG Past Earnings Growth December 20, 2021

Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if MEG Energy is trading high P / E or low P / E, relative to its industry.

Is MEG Energy using its profits efficiently?

Since MEG Energy does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to develop its business.

Conclusion

All in all, it seems that MEG Energy has positive aspects for its business. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. However, the latest analysts’ forecasts show that the company will continue to see its profits increase. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.


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