Is International Petroleum Corporation’s (TSE:IPCO) Latest Stock Performance A Reflection Of Its Financial Health?

International Petroleum (TSE:IPCO) has had a great run in the stock market, with its stock up a whopping 6.9% over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health typically drives market results. Specifically, we decided to examine International Petroleum’s ROE in this article.

Return on equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. Put simply, it is used to assess a company’s profitability in relation to its equity.

Check out our latest analysis for International Petroleum

How do you calculate return on equity?

The ROE can be calculated using the following formula:

Return on Equity = Net Income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for International Petroleum is:

35% = $338M ÷ $965M (based on trailing 12 months to December 2022).

“Yield” refers to a company’s profits over the past year. This means that for every CA$1 invested by its shareholders, the company generates a profit of CA$0.35.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an efficient profitable measure of a company’s future profits. Depending on how much of these earnings the company reinvests, or “retains,” and how effectively it does so, we can assess a company’s earnings growth potential. In general, companies with a high return on equity and earnings retention, all other things being equal, have a higher growth rate than companies that do not share these characteristics.

A head-to-head comparison of International Petroleum’s earnings growth and 35% ROE

First of all, International Petroleum has a pretty high ROE, which is interesting. Second, we also see a comparison to the industry-reported average ROE of 23%. So the substantial 35% net income growth that International Petroleum has seen over the past five years isn’t all that surprising.

Next, when we compared International Petroleum’s net income growth to the industry, we found that the company’s reported growth is similar to the industry average growth rate of 34% over the same period.

Much of the basis for increasing the value of a company is tied to its earnings growth. The investor should try to determine whether expected growth or earnings decline, whichever is the case, is being priced in. This helps him determine if the stock’s future looks bright or ominous. If you’re wondering about International Petroleum’s valuation, check out this benchmark of price-to-earnings versus its industry.

Is International Petroleum using its retained earnings effectively?

International Petroleum doesn’t currently pay a dividend, which essentially means it has reinvested all of its profits into the company. This definitely contributes to the high earnings growth we discussed above.

Diploma

Overall, we are quite pleased with International Petroleum’s performance. We particularly like that the company reinvests a large portion of its profits with a high return. Naturally, this has resulted in the company being able to significantly increase its profits. However, reading the latest analyst estimates, we are concerned that while the company has a history of growing earnings, analysts expect earnings to shrink in the future. Are these analyst expectations based on broader expectations for the industry or on company fundamentals? Click here to go to our analyst’s forecast page for the company.

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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.