In This Article:
Most readers would already be aware that Dundee Precious Metals' (TSE:DPM) stock increased significantly by 9.7% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Dundee Precious Metals' ROE in this article.
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.
View our latest analysis for Dundee Precious Metals
How Is ROE Calculated?
ROE 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 Dundee Precious Metals is:
17% = US$209m ÷ US$1.2b (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$0.17 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 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 Dundee Precious Metals' Earnings Growth And 17% ROE
To begin with, Dundee Precious Metals seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.7%. This probably laid the ground for Dundee Precious Metals' significant 26% net income growth seen over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing Dundee Precious Metals' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 24% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Dundee Precious Metals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.