PrimeEnergy Resources Corporation's (NASDAQ:PNRG) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
PrimeEnergy Resources' (NASDAQ:PNRG) stock is up by a considerable 10% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to PrimeEnergy Resources' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for PrimeEnergy Resources
How Do You Calculate Return On Equity?
Return on equity 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 PrimeEnergy Resources is:
28% = US$39m ÷ US$139m (Based on the trailing twelve months to March 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.28.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
PrimeEnergy Resources' Earnings Growth And 28% ROE
Firstly, we acknowledge that PrimeEnergy Resources has a significantly high ROE. Even when compared to the industry average of 28% the company's ROE is pretty decent. The high ROE therefore is what most likely laid the ground for the decent growth of 16% seen over the past five years by PrimeEnergy Resources.
Next, on comparing with the industry net income growth, we found that PrimeEnergy Resources' reported growth was lower than the industry growth of 27% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 PrimeEnergy Resources is trading on a high P/E or a low P/E, relative to its industry.
Is PrimeEnergy Resources Using Its Retained Earnings Effectively?
PrimeEnergy Resources doesn't pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.
Conclusion
On the whole, we feel that PrimeEnergy Resources' 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 a good amount of 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. You can see the 1 risk we have identified for PrimeEnergy Resources 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.
