Declining Stock and Decent Financials: Is The Market Wrong About Southern Alliance Mining Ltd. (Catalist:QNS)?

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With its stock down 28% over the past three months, it is easy to disregard Southern Alliance Mining (Catalist:QNS). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Southern Alliance Mining's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Southern Alliance Mining

How To 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 Southern Alliance Mining is:

4.5% = RM16m ÷ RM358m (Based on the trailing twelve months to July 2022).

The 'return' is the yearly profit. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.05.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Southern Alliance Mining's Earnings Growth And 4.5% ROE

On the face of it, Southern Alliance Mining's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 11%. However, we we're pleasantly surprised to see that Southern Alliance Mining grew its net income at a significant rate of 27% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Southern Alliance Mining's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 34% in the same period.

past-earnings-growth
Catalist:QNS Past Earnings Growth December 11th 2022

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. 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 Southern Alliance Mining is trading on a high P/E or a low P/E, relative to its industry.