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Most readers would already be aware that Genesis Minerals' (ASX:GMD) stock increased significantly by 24% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Genesis Minerals' 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.
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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 Genesis Minerals is:
11% = AU$120m ÷ AU$1.1b (Based on the trailing twelve months to December 2024).
The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.11 in profit.
Check out our latest analysis for Genesis Minerals
What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Genesis Minerals' Earnings Growth And 11% ROE
To begin with, Genesis Minerals seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. This certainly adds some context to Genesis Minerals' exceptional 23% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Genesis Minerals' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 20% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is GMD worth today? The intrinsic value infographic in our free research report helps visualize whether GMD is currently mispriced by the market.