With its stock down 16% over the past three months, it is easy to disregard NZ Windfarms (NZSE:NWF). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to NZ Windfarms' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How To Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for NZ Windfarms is:
13% = NZ$5.2m ÷ NZ$41m (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.13 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 NZ Windfarms' Earnings Growth And 13% ROE
To begin with, NZ Windfarms seems to have a respectable ROE. On comparing with the average industry ROE of 9.6% the company's ROE looks pretty remarkable. Probably as a result of this, NZ Windfarms was able to see an impressive net income growth of 52% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
We then compared NZ Windfarms' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about NZ Windfarms''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is NZ Windfarms Making Efficient Use Of Its Profits?
NZ Windfarms' very high three-year median payout ratio of 300% suggests that the company is paying more to its shareholders than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk. You can see the 3 risks we have identified for NZ Windfarms by visiting our risks dashboard for free on our platform here.
Besides, NZ Windfarms has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.
In total, it does look like NZ Windfarms has some positive aspects to its business. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into NZ Windfarms' past profit growth, check out this visualization of past earnings, revenue and cash flows.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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