Enwell Energy plc (LON: ENW) shares have experienced strong momentum: does this require a more in-depth study of its financial outlook?

Enwell Energy (LON: ENW) shares have risen 54% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . Specifically, we have decided to study the ROE of Enwell Energy in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

See our latest review for Enwell Energy

How to calculate return on equity?

The formula for ROE is:

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

Thus, based on the above formula, the ROE of Enwell Energy is:

2.5% = US $ 3.2 million ÷ US $ 126 million (based on the last twelve months up to December 2020).

“Return” refers to a company’s profits over the past year. So this means that for every £ 1 invested by its shareholder, the company generates a profit of £ 0.03.

What does ROE have to do with profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion 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 the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

Enwell Energy profit growth and 2.5% ROE

It’s pretty clear that Enwell Energy’s ROE is rather low. Not only that, even compared to the industry average of 10%, the company’s ROE is quite unremarkable. However, we are pleasantly surprised to see that Enwell Energy has increased its bottom line at a significant rate of 25% over the past five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

As a next step, we compared Enwell Energy’s net income growth with the industry and luckily we found that the growth observed by the company is above the industry average growth of 17%.

TARGET: Growth of ENW’s past earnings on September 17, 2021

Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. If you’re wondering about Enwell Energy’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.

Is Enwell Energy Efficiently Reinvesting Its Profits?

Conclusion

Overall, we think Enwell Energy has some positive attributes. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. To know the 2 risks that we have identified for Enwell Energy, visit our risk dashboard free of charge.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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