With its stock down 19% in the past three months, it’s easy to overlook Cobra Venture (CVE:CBV). However, stock prices are usually determined by a company’s long-term finances, which in this case seem quite respectable. In particular, we will be paying attention to Cobra Venture’s ROE today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
Check out our latest analysis for Cobra Venture
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Cobra Venture is:
5.8% = CA$197,000 ÷ CA$3.4M (based on trailing 12 months to Feb 2022).
“Yield” is the income the business has earned over the past year. Another way to think about this is that for every CA$1 of equity, the company was able to make a profit of CA$0.06.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Cobra Venture earnings growth and ROE of 5.8%
When you first look at it, Cobra Venture’s ROE doesn’t look that appealing. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 23%. However, we are pleasantly surprised to see that Cobra Venture has grown its net profit at a significant rate of 52% over the past five years. Therefore, there could be other reasons behind this growth. For example, the business has a low payout ratio or is efficiently managed.
We then compared Cobra Venture’s net income growth with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 16% in during the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. A 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 outlook. So, you might want to check if Cobra Venture is trading on a high P/E or a low P/E, relative to its industry.
Does Cobra Venture effectively reinvest its profits?
Since Cobra Venture does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.
Overall, we think Cobra Venture has positive attributes. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. Our risk dashboard would have the 3 risks we identified for Cobra Venture.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.