Most readers will already know that the Auric Mining (ASX:AWJ) share price has increased by a significant 60% over the past three months. Given that the market rewards strong financials in the long run, I wonder if that will be the case this time as well. In particular, I would like to pay attention to Auric Mining'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 receives from its shareholders. Simply put, it is used to evaluate a company's profitability compared to its equity.
Check out our latest analysis for Auric Mining.
How do I calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Auric Mining's ROE is:
11% = AU$1.3 million ÷ AU$12 million (based on the trailing twelve months to December 2023).
“Return” is the profit over the past 12 months. Another way to think of it is that for every A$1 worth of shares, the company earned him A$0.11 in profit.
What relationship does ROE have with profit growth?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. We are then able to evaluate a company's future ability to generate profits based on how much of its profits it chooses to reinvest or “retain”. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
A side-by-side comparison of Auric Mining's earnings growth and ROE of 11%.
First, Auric Mining's ROE looks acceptable. Moreover, his ROE for the company is in line with the industry average of 10%. This certainly gives some context to the modest 16% growth in Auric Mining's net income over the past five years.
Next, when compared to the industry's net income growth, we find that Auric Mining's reported growth is lower than the industry's 20% growth over the past few years. This is what we don't want to see.
Earnings growth is an important metric to consider when evaluating a stock. Investors should check whether expected growth or decline in earnings has been factored in in any case. This will help you determine whether the stock's future is bright or bleak. 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 outlook. So you might want to check whether Auric Mining is trading on a higher or lower P/E relative to its industry.
Is Auric Mining using its profits efficiently?
Auric Mining does not pay dividends. This means that all profits are reinvested into the business, which explains the company's considerable revenue growth.
summary
Overall, we are quite satisfied with Auric Mining's performance. In particular, we like that the company is reinvesting heavily in its business and has a high rate of return. It's no surprise that the result is a significant increase in revenue. If the company continues to grow its revenue as it has, this could have a positive impact on the stock price, given how earnings per share affect the stock price over the long term. Remember, the stock price outcome also depends on the underlying risks that the company may face. Therefore, it is important for investors to be aware of the risks associated with the business. To learn about the four risks he has identified regarding Auric Mining, visit our risks dashboard for free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
