CNMC Goldmine Holdings (Catalist:5TP) has had a great run on the share market with its stock up by a significant 24% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on CNMC Goldmine Holdings' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for CNMC Goldmine Holdings
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for CNMC Goldmine Holdings is:
17% = US$8.5m ÷ US$50m (Based on the trailing twelve months to June 2024).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.17.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of CNMC Goldmine Holdings' Earnings Growth And 17% ROE
To start with, CNMC Goldmine Holdings' ROE looks acceptable. On comparing with the average industry ROE of 8.3% the company's ROE looks pretty remarkable. This probably laid the ground for CNMC Goldmine Holdings' moderate 16% net income growth seen over the past five years.
We then performed a comparison between CNMC Goldmine Holdings' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 19% in the same 5-year period.
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. This then helps them determine if the stock is placed for a bright or bleak future. 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 prospects. So, you may want to check if CNMC Goldmine Holdings is trading on a high P/E or a low P/E, relative to its industry.