Australia markets closed
  • ALL ORDS

    7,369.40
    -53.80 (-0.72%)
     
  • AUD/USD

    0.6720
    -0.0006 (-0.09%)
     
  • ASX 200

    7,175.50
    -53.90 (-0.75%)
     
  • OIL

    72.82
    +0.81 (+1.12%)
     
  • GOLD

    1,794.60
    -3.40 (-0.19%)
     
  • BTC-AUD

    25,035.80
    -171.75 (-0.68%)
     
  • CMC Crypto 200

    394.89
    -7.14 (-1.78%)
     

Capricorn Metals Ltd's (ASX:CMM) Stock Is Going Strong: Is the Market Following Fundamentals?

Capricorn Metals (ASX:CMM) has had a great run on the share market with its stock up by a significant 8.9% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Capricorn Metals' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Capricorn Metals

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Capricorn Metals is:

24% = AU$49m ÷ AU$205m (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.24 in profit.

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. 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.

Capricorn Metals' Earnings Growth And 24% ROE

Firstly, we acknowledge that Capricorn Metals has a significantly high ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. This probably laid the groundwork for Capricorn Metals' moderate 16% net income growth seen over the past five years.

As a next step, we compared Capricorn Metals' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 28% in the same period.

past-earnings-growth
past-earnings-growth

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. If you're wondering about Capricorn Metals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Capricorn Metals Efficiently Re-investing Its Profits?

Given that Capricorn Metals doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with Capricorn Metals' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here