Orca Energy Group Inc.'s (CVE:ORC.B) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

·3 min read

With its stock down 3.0% over the past month, it is easy to disregard Orca Energy Group (CVE:ORC.B). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Orca Energy Group's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Orca Energy Group

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 Orca Energy Group is:

28% = US$22m ÷ US$78m (Based on the trailing twelve months to March 2022).

The 'return' refers to a company's earnings over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.28 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Orca Energy Group's Earnings Growth And 28% ROE

First thing first, we like that Orca Energy Group has an impressive ROE. Even when compared to the industry average of 24% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 29% net income growth seen by Orca Energy Group was probably achieved as a result of the high ROE.

Next, on comparing with the industry net income growth, we found that Orca Energy Group's growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Orca Energy Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Orca Energy Group Making Efficient Use Of Its Profits?

Orca Energy Group has a three-year median payout ratio of 25% (where it is retaining 75% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Orca Energy Group is reinvesting its earnings efficiently.

Additionally, Orca Energy Group has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Orca Energy Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for Orca Energy Group visit our risks dashboard for free.

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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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