Kelt Exploration Ltd.'s (TSE:KEL) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
Kelt Exploration’s (TSE:KEL) stock is up by a considerable 39% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Kelt Exploration’s ROE today.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Kelt Exploration
How Do You 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 Kelt Exploration is:
13% = CA$119m ÷ CA$948m (Based on the trailing twelve months to June 2023).
The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.13 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Kelt Exploration’s Earnings Growth And 13% ROE
To begin with, Kelt Exploration seems to have a respectable ROE. Yet, the fact that the company’s ROE is lower than the industry average of 20% does temper our expectations. That being the case, the significant five-year 35% net income growth reported by Kelt Exploration comes as a pleasant surprise. We reckon that there could be other factors at play here. Such as – high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.
We then performed a comparison between Kelt Exploration’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 41% in the same 5-year 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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Kelt Exploration is trading on a high P/E or a low P/E, relative to its industry.
Is Kelt Exploration Making Efficient Use Of Its Profits?
Kelt Exploration doesn’t pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what’s driving the high earnings growth number discussed above.
Summary
Overall, we are quite pleased with Kelt Exploration’s performance. In particular, it’s great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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. You can see the 1 risk we have identified for Kelt Exploration by visiting our risks dashboard for free on our platform here.
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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.