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With its stock down 24% over the past three months, it is easy to disregard Steppe Gold (TSE:STGO). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Steppe Gold's 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Steppe Gold
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Steppe Gold is:
48% = US$22m ÷ US$45m (Based on the trailing twelve months to June 2023).
The 'return' is the income the business earned over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.48 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.
Steppe Gold's Earnings Growth And 48% ROE
To begin with, Steppe Gold has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 9.9% the company's ROE is quite impressive. As a result, Steppe Gold's exceptional 26% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Steppe Gold's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 30% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Steppe Gold's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.