Most readers already know that shares of Silver Lake Resources (ASX:SLR) are up a significant 16% in the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In particular, we’ll be paying attention to Silver Lake Resources’ ROE today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out 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. This means that for every Australian dollar of equity, the company generated a profit of 0.08 Australian dollars.
Why is ROE important for earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
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%. However, we are pleasantly surprised to see that Silver Lake Resources has grown its net profit at a significant rate of 54% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. 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.
We then compared Silver Lake Resources net income growth with the industry and we are pleased to see that the company growth figure is higher compared to the industry which has a growth rate of 25% during the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. If you’re wondering about the valuation of Silver Lake Resources, check out this indicator of its price-earnings ratio, relative to its industry.
Does Silver Lake Resources effectively reinvest its profits?
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.
Overall, we think Silver Lake Resources certainly has some positive factors to consider. Even despite the low rate of return, the company posted impressive earnings growth thanks to massive reinvestment in its business. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.