Shares of BluMetric Environmental Inc. (CVE:BLM) are on an uptrend: Are strong financials guiding the market?

BluMetric Environmental (CVE:BLM) stock is up 11% over the past week. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. Specifically, we decided to study the ROE of BluMetric Environmental in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest analysis for BluMetric Environmental

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for BluMetric Environmental is:

22% = CAD$2.4 million ÷ CAD$11 million (based on trailing 12 months to June 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$0.22.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the share of its profits that 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 relative to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of BluMetric Environmental’s earnings growth and 22% ROE

For starters, BluMetric Environmental has a pretty high ROE, which is interesting. Additionally, the company’s ROE is above the industry average of 8.4%, which is quite remarkable. So, the substantial net income growth of 29% observed by BluMetric Environmental over the past five years is not too surprising.

Then, comparing with the industry net income growth, we found that the growth of BluMetric Environmental is quite high compared to the average industry growth of 7.8% over the same period, which which is great to see.

TSXV:BLM Prior Earnings Growth September 22, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about BluMetric Environmental’s valuation, check out this indicator of its price/earnings ratio, relative to its industry.

Does BluMetric Environmental effectively reinvest its profits?

BluMetric Environmental currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high earnings growth number we discussed above.

Conclusion

Overall, we believe BluMetric Environmental’s performance has been quite good. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. If the company continues to increase earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Not to mention that stock price results also depend on the potential risks that a company may face. It is therefore important for investors to be aware of the risks associated with the business. To see the 1 risk we have identified for BluMetric Environmental, visit our risk dashboard for free.

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.

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