Should weakness in Silver Lake Resources Limited (ASX:SLR) stock be taken as a sign that the market will correct the stock price given decent financials?

Silver Lake Resources (ASX:SLR) had a tough three months with its share price down 17%. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we decided to focus on Silver Lake Resources’ DEER.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Silver Lake Resources

How to calculate return on equity?

Return on equity can be calculated using the formula:

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

So, based on the above formula, the ROE for Silver Lake Resources is:

8.2% = AU$77 million ÷ AU$942 million (based on trailing 12 months to December 2021).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every Australian dollar of share capital it has, the company has made a profit of 0.08 Australian dollars.

What does ROE have to do with 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 gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Earnings growth and ROE of 8.2% from Silver Lake Resources

At first glance, Silver Lake Resources’ ROE isn’t much to tell. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 16%. Despite this, surprisingly, Silver Lake Resources has experienced an exceptional growth in net income of 54% over the past five years. We feel there could be other factors at play here. For example, the business has a low payout ratio or is efficiently managed.

Then, comparing with the industry net income growth, we found that Silver Lake Resources growth is quite high compared to the industry average growth of 26% over the same period, which is great to see.

past earnings-growth

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. A 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 check if Silver Lake Resources is trading on a high P/E or a low P/Ein relation to its industry.

Is Silver Lake Resources using its profits efficiently?

Since Silver Lake Resources pays no dividends to its shareholders, we infer that the company has reinvested all of its earnings to grow its business.

Conclusion

All in all, it seems that Silver Lake Resources has some positive aspects to its business. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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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.