Cobra Venture Corporation (CVE:CBV) Stock Falls But Fundamentals Look Strong: Is the Market Wrong?

Cobra Venture Inc (CVE:CBV) had a tough week with its share price down 11%. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In particular, we will be paying attention to Cobra Venture’s ROE today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

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How is ROE calculated?

The return on equity formula is:

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

So, based on the formula above, the ROE for Cobra Venture is:

11% = CA$322,000 ÷ CA$3.0M (based on trailing 12 months to May 2022).

“Yield” is the income the business has earned over the past year. This therefore means that for every C$1 of investment by its shareholder, the company generates a profit of C$0.11.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently 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 earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Cobra Venture Earnings Growth and 11% ROE

For starters, Cobra Venture seems to have a respectable ROE. Even so, compared to the industry average ROE of 24%, we are not very enthusiastic. That said, the significant net income growth of 59% over five years reported by Cobra Venture is a pleasant surprise. Therefore, there could be other causes 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. However, it’s worth remembering that the company has a decent ROE to start with, just that it’s below the industry average. So that also gives some color to the strong earnings growth the company is seeing.

We then compared Cobra Venture’s net income growth with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 26% in during the same period.

TSXV: CBV Past Earnings Growth October 18, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. If you’re wondering about Cobra Venture’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.

Does Cobra Venture make effective use of its retained earnings?

Cobra Venture does not pay any dividends to its shareholders, which means that the company has reinvested all of its profits back into the business. This is probably what explains the strong earnings growth discussed above.

Conclusion

Overall, we’re pretty happy with Cobra Venture’s performance. In particular, it is good to see that the company has experienced significant earnings growth supported by a respectable ROE and a high reinvestment rate. 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. You can see the 2 risks we have identified for Cobra Venture by visiting our risk dashboard for free on our platform here.

Valuation is complex, but we help make it simple.

Find out if Cobra Venture is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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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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