Yahoo Finance Declining Stock and Solid Fundamentals: Is The Market Wrong About Evolution Mining Limited (ASX:EVN)?
It is hard to get excited after looking at Evolution Mining's (ASX:EVN) recent performance, when its stock has declined 16% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Evolution Mining's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Evolution Mining
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 Evolution Mining is:
15% = AU$383m ÷ AU$2.5b (Based on the trailing twelve months to December 2020).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.15 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Evolution Mining's Earnings Growth And 15% ROE
To start with, Evolution Mining's ROE looks acceptable. Even when compared to the industry average of 15% the company's ROE looks quite decent. This certainly adds some context to Evolution Mining's exceptional 31% 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.
As a next step, we compared Evolution Mining'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 32% in the same period.
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. Has the market priced in the future outlook for EVN? You can find out in our latest intrinsic value infographic research report.
Is Evolution Mining Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 71% (implying that it keeps only 29% of profits) for Evolution Mining suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Additionally, Evolution Mining has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 61%. However, Evolution Mining's ROE is predicted to rise to 19% despite there being no anticipated change in its payout ratio.
Summary
Overall, we are quite pleased with Evolution Mining's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
This article by Simply Wall St is general in nature. 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.
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