BQE Water (CVE:BQE) stock is up a respectable 18% over the past month. Given that the market rewards strong financials over the long term, we wonder if that’s the case in this case. In particular, we’ll be paying attention to BQE Water’s return on equity today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investments it receives from its shareholders. In simpler terms, it measures the profitability of a company relative to shareholders’ equity.

Check out our latest analysis for BQE Water

How do you calculate return on equity?

The Formula for return on equity Is:

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

Based on the above formula, the ROE for BQE water is:

17% = CA$2.5 million ÷ CA$14 million (based on the trailing twelve months to March 2024).

The “return” is the amount earned after taxes over the last twelve months. You can think of it like this: for every Canadian dollar of shareholder capital, the company earned 0.17 Canadian dollars in profit.

What is the relationship between ROE and earnings growth?

So far we have learned that return on equity measures how efficiently a company generates its profits. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which then gives us an idea of ​​the company’s growth potential. Generally speaking, all other things being equal, companies with high return on equity and retention of profits will have a higher growth rate than companies that do not have these characteristics.

A comparison of BQE Water’s earnings growth and return on equity of 17%

First of all, BQE Water’s return on equity looks acceptable. Compared to the industry average return on equity of 9.7%, the company’s return on equity looks quite remarkable. This has probably laid the foundation for BQE Water’s significant net income growth of 29% over the past five years. However, there could be other reasons for this growth. For example, the company has a low payout ratio or is managed efficiently.

Next, we compared BQE Water’s net profit growth with that of the industry. We were pleased to see that the company’s growth is above the average industry growth of 9.5%.

Earnings growth is an important factor in stock valuation. Next, investors need to determine whether the expected earnings growth, or lack thereof, is already factored into the stock price. This will help them get an idea of ​​whether the stock is heading for clear waters or whether it is drifting into murky waters. Is BQE Water fairly valued compared to other companies? These 3 valuation metrics can help you decide.

The story continues

Does BQE Water use its retained earnings effectively?

Since BQE Water does not pay regular dividends to its shareholders, we assume that the company has reinvested all its profits in business expansion.

Summary

Overall, we are very pleased with BQE Water’s performance. We particularly like that the company is reinvesting heavily in its business at a high rate of return. Unsurprisingly, this has resulted in impressive earnings growth. With this in mind, the latest analyst forecasts show that the company will continue to see earnings growth. Are these analyst expectations based on broader expectations for the industry or on the company’s fundamentals? Click here to go to our analyst forecasts page for the company.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.