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Mako Mining (CVE:MKO) has had a great run on the share market with its stock up by a significant 44% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Mako Mining's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Is ROE Calculated?
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 Mako Mining is:
34% = US$24m ÷ US$70m (Based on the trailing twelve months to September 2024).
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$0.34 in profit.
Check out our latest analysis for Mako Mining
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Mako Mining's Earnings Growth And 34% ROE
Firstly, we acknowledge that Mako Mining has a significantly high ROE. Secondly, even when compared to the industry average of 10.0% the company's ROE is quite impressive. So, the substantial 59% net income growth seen by Mako Mining over the past five years isn't overly surprising.
We then compared Mako Mining's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 21% in the same 5-year period.
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). 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 Mako Mining's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.