Declining Stock and Solid Fundamentals: Is The Market Wrong About Pulse Seismic Inc. (TSE:PSD)?

It is hard to get excited after looking at Pulse Seismic’s (TSE:PSD) recent performance, when its stock has declined 14% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Pulse Seismic’s ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Pulse Seismic

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Pulse Seismic is:

18% = CA$7.0m ÷ CA$38m (Based on the trailing twelve months to June 2022).

The ‘return’ is the amount earned after tax over the last twelve months. That means that for every CA$1 worth of shareholders’ equity, the company generated CA$0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Pulse Seismic’s Earnings Growth And 18% ROE

To begin with, Pulse Seismic seems to have a respectable ROE. On comparing with the average industry ROE of 15% the company’s ROE looks pretty remarkable. This certainly adds some context to Pulse Seismic’s decent 5.9% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Pulse Seismic’s growth is quite high when compared to the industry average growth of 4.1% in the same period, which is great to see.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. 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. If you’re wondering about Pulse Seismic’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Pulse Seismic Using Its Retained Earnings Effectively?

Pulse Seismic’s three-year median payout ratio to shareholders is 7.1% (implying that it retains 93% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Pulse Seismic is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, we are pretty happy with Pulse Seismic’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Pulse Seismic visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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