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Andean Precious Metals (CVE:APM) has had a great run on the share market with its stock up by a significant 84% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Andean Precious Metals' ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Andean Precious Metals
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Andean Precious Metals is:
35% = US$47m ÷ US$137m (Based on the trailing twelve months to June 2024).
The 'return' refers to a company's earnings over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.35 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Andean Precious Metals' Earnings Growth And 35% ROE
To begin with, Andean Precious Metals has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 9.0% which is quite remarkable. However, for some reason, the higher returns aren't reflected in Andean Precious Metals' meagre five year net income growth average of 4.0%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared Andean Precious Metals' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 26% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Andean Precious Metals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.