Brookfield Renewable (TSE:BEPC) has had a great run on the share market with its stock up by a significant 13% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Brookfield Renewable'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Brookfield Renewable

How To Calculate Return On Equity?

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 Brookfield Renewable is:

6.9% = US$1.0b ÷ US$15b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.07 in profit.

What Is The Relationship Between ROE And 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. 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.

Brookfield Renewable's Earnings Growth And 6.9% ROE

On the face of it, Brookfield Renewable's ROE is not much to talk about. However, its ROE is similar to the industry average of 8.5%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Brookfield Renewable's net income grew significantly at a rate of 40% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Brookfield Renewable's 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 40% in the same period.

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). This then helps them determine if the stock is placed for a bright or bleak future. 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 Brookfield Renewable is trading on a high P/E or a low P/E, relative to its industry.

Is Brookfield Renewable Using Its Retained Earnings Effectively?

Brookfield Renewable has a three-year median payout ratio of 34% (where it is retaining 66% of its income) which is not too low or not too high. So it seems that Brookfield Renewable is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Brookfield Renewable has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Brookfield Renewable has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.