Centerra Gold Inc.'s (TSE:CG) Stock Is Going Strong: Have Financials A Role To Play?

Simply Wall St

Thu, Dec 17, 2020, 9:58 PM 4 min read

Most readers would already be aware that Centerra Gold's (TSE:CG) stock increased significantly by 26% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Centerra Gold's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Centerra Gold

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Centerra Gold is:

13% = US$301m ÷ US$2.4b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.13.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Centerra Gold's Earnings Growth And 13% ROE

To begin with, Centerra Gold seems to have a respectable ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. Needless to say, we are quite surprised to see that Centerra Gold's net income shrunk at a rate of 5.0% over the past five years. Therefore, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

However, when we compared Centerra Gold's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 33% in the same period. This is quite worrisome.

past-earnings-growth — TSX:CG Past Earnings Growth December 18th 2020

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for CG? You can find out in our latest intrinsic value infographic research report.

Is Centerra Gold Making Efficient Use Of Its Profits?

Centerra Gold's low LTM (or last twelve month) payout ratio of 9.5% (implying that it retains the remaining 90% of its profits) comes as a surprise when you pair it with the shrinking earnings. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

Moreover, Centerra Gold has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 10%. Still, forecasts suggest that Centerra Gold's future ROE will drop to 8.9% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we feel that Centerra Gold certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. In addition, latest analyst forecasts reveal that the company's earnings growth is expected be similar to its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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