Zodiac Energy (NSE:ZODIAC) has had a great run on the share market with its stock up by a significant 16% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Zodiac Energy’s ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
Check out our latest analysis for Zodiac Energy
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Zodiac Energy is:
16% = ₹45m ÷ ₹280m (Based on the trailing twelve months to March 2021).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.16 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. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
Zodiac Energy’s Earnings Growth And 16% ROE
At first glance, Zodiac Energy seems to have a decent ROE. Especially when compared to the industry average of 9.7% the company’s ROE looks pretty impressive. Probably as a result of this, Zodiac Energy was able to see an impressive net income growth of 33% over the last five years. We reckon that there could also be other factors at play here. Such as – high earnings retention or an efficient management in place.
We then compared Zodiac Energy’s 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 5.1% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One 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 prospects. So, you may want to check if Zodiac Energy is trading on a high P/E or a low P/E, relative to its industry.
Is Zodiac Energy Efficiently Re-investing Its Profits?
While the company did pay out a portion of its dividend in the past, it currently doesn’t pay a dividend. This is likely what’s driving the high earnings growth number discussed above.
On the whole, we feel that Zodiac Energy’s performance has been quite good. 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. Until now, we have only just grazed the surface of the company’s past performance by looking at the company’s fundamentals. You can do your own research on Zodiac Energy and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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