Will Weakness in PrimeEnergy Resources Corporation's (NASDAQ:PNRG) Stock Prove Temporary Given Strong Fundamentals?
PrimeEnergy Resources (NASDAQ:PNRG) has had a rough three months with its share price down 3.9%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for PrimeEnergy Resources
How Is ROE Calculated?
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 PrimeEnergy Resources is:
23% = US$36m ÷ US$156m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.23 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
PrimeEnergy Resources' Earnings Growth And 23% ROE
First thing first, we like that PrimeEnergy Resources has an impressive ROE. Even when compared to the industry average of 21% the company's ROE is pretty decent. Given the circumstances, the significant 34% net income growth seen by PrimeEnergy Resources over the last five years is not surprising.
As a next step, we compared PrimeEnergy Resources' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 36% 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. Doing so will help them establish if the stock's future looks promising or ominous. Is PrimeEnergy Resources fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is PrimeEnergy Resources Efficiently Re-investing Its Profits?
PrimeEnergy Resources 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.
Conclusion
In total, we are pretty happy with PrimeEnergy Resources' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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 2 risks 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.
