With its stock down 10% over the past three months, it is easy to disregard Topaz Energy (TSE:TPZ). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Topaz Energy's  ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To 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 Topaz Energy is:

3.5% = CA$46m ÷ CA$1.3b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.04 in profit.

See our latest analysis for Topaz Energy

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Topaz Energy's Earnings Growth And 3.5% ROE

It is quite clear that Topaz Energy's ROE is rather low. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. Despite this, surprisingly, Topaz Energy saw an exceptional 26% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Topaz Energy's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 37% in the same period.TSX:TPZ Past Earnings Growth March 24th 2025

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Topaz Energy is trading on a high P/E or a low P/E, relative to its industry.

Story Continues

Is Topaz Energy Efficiently Re-investing Its Profits?

The really high three-year median payout ratio of 336% for Topaz Energy suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. You can see the 2 risks we have identified for Topaz Energy by visiting our risks dashboard for free  on our platform here.

Besides, Topaz Energy has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 141% over the next three years.

Conclusion

Overall, we would be extremely cautious before making any decision on Topaz Energy. While the company has posted decent earnings growth, the company is retaining little to no profits and is reinvesting those profits at a low rate of return. This makes us doubtful if that growth could continue, especially if by any chance the business is faced with any sort of risk. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.

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