Analysis of Capital Power Corporation's (TSE:CPX) ROE and Debt-to-Equity Ratio

2 min read | February 12, 2025 11:30 PM EST | By Team Kalkine Media

Analysis of Capital Power Corporation's (TSE:CPX) ROE and Debt-to-Equity Ratio — Image source: Shutterstock

What is ROE and How is it Calculated?

ROE is calculated using the formula:

Return on Equity = Net Profit ÷ Shareholders' Equity

For Capital Power, the ROE is calculated as follows: 15% = CA$554m ÷ CA$3.8b, based on the trailing twelve months to September 2024.

This equates to earning CA$0.15 for every CA$1 of equity, reflecting the company's profit efficiency.

Assessing Capital Power's ROE

By comparing Capital Power's ROE to the Renewable Energy industry's average of 13%, we notice it aligns closely. While this doesn't make it a standout, it's acceptable. Evaluating further entails analyzing the company's debt levels as excessive debt could artificially enhance the ROE.

Debt's Impact on ROE

Every business requires funds for growth, which may come from internal profits, issuing new shares, or borrowing. Debt can amplify returns, making the ROE seem better as it doesn't increase shareholders' equity. Capital Power's debt-to-equity ratio at 1.33 highlights its notable reliance on debt.

Before forming a conclusion, consider how a company's performance might shift if borrowing conditions change.

Comparing ROE across companies provides insights into business quality, particularly when analyzing debt levels. ROE should be considered alongside profit growth rates and market price expectations. For expanded analysis, explore interactive data graphs and lists of companies with high ROE and minimal debt.

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