How to Project Profits and Find Undervalued Opportunities

With consistent returns on equity, shares of Lassonde Industries Inc. (TSX:LAS.A) are where investors can find incredible value.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Before making an investment, it is important to understand the price that is being paid per share in addition to what each share offers to investors. In certain circumstances, weighing out the share price and the dividend yield are very easy things, but when it comes to projecting profits into the next fiscal year, things can sometimes get complicated.

Luckily for many mature companies, projecting next-year profits is something that can sometimes be done fairly easily. For high-growth or cyclical companies, the task is much more difficult. Taking shares of North West Company Inc. (TSX:NWC) as as example, investors are able to reasonably estimate the future profits for the company for the next fiscal year.

When considering the amount of earnings and the amount of shareholders’ equity over the past four years, the average return on equity (ROE) can be calculated to be approximately 20%. In fact, the ROEs for fiscal 2013 through 2016 were 20.7%, 19.3%, 20.3%, 21.3%, which is as consistent as ROEs can be.

As the shareholders’ equity at the end of the previous fiscal year was $367 million, the calculation to arrive at the projected earnings per share (EPS) for the next fiscal year is:

[(ROE x shareholders’ equity) / shares outstanding].

In the case of North West Company, the numbers work out as follows:

(20% x $367 million) / 48.54 million = projected EPS of $1.51.

The company has reported quarterly earnings of $0.31 and $0.17 in the first two quarters of the fiscal year. Although the first quarter met expectations, the company recognized some one-time expenses during the second quarter, leading to lower EPS. Given the defensive nature of North West Company, those making an investment in this company can set their own expectations with a few simple calculations. As North West Company is in the very defensive grocery business, earnings can be almost evenly spread over four quarters, leading to expectations of $0.38 in quarterly profits.

Given the current challenging operating environment for North West Company, this may be a case where investors want to look elsewhere for value. Investors need to find a company that will deliver!

When evaluating the same numbers for Lassonde Industries Inc. (TSX:LAS.A), the ROEs have averaged only 12.7%, but the company has delivered throughout the first half of the year. With the expectation of $9.85 in EPS for fiscal 2017, the company has delivered $4.62 during the first half of the year.

Although the company is fairly defensive, it should still be noted that one-third of last year’s profits came in the fourth quarter. Clearly, there is a lot of potential left over for investors looking at this name!

As every company is required to report quarterly financial statements to the public, it is essential for investors to look behind the curtain and figure out just what is happening on a company’s balance sheet. Although the act of investing and making money is exciting, it must never be forgotten to measure at least twice and cut once.

Should you invest $1,000 in Equinox Gold Corp. right now?

Before you buy stock in Equinox Gold Corp., consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Equinox Gold Corp. wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor has no position in any stock mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

This 10.6 Percent Dividend Stock Pays Cash Every Single Month

Are you looking to invest for a rainy day? This 10.6% dividend stock pays cash every month, irrespective of the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Market Dip: Opportunity or Risk This April?

This market dip might have investors worried, but should they be excited instead?

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Why I’d Add This Top TSX Dividend Stock to My TFSA During the Current Dip

The market is full of volatility right now. Fortunately, this top TSX dividend trades at a discount and pays a…

Read more »