Will Weakness in Anglo Asian Mining PLC's (LON:AAZ) Stock Prove Temporary Given Strong Fundamentals?

Anglo Asian Mining (LON:AAZ) has had a rough three months with its share price down 14%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Anglo Asian Mining's ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Anglo Asian 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 Anglo Asian Mining is:

15% = US$18m ÷ US$124m (Based on the trailing twelve months to June 2021).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 Anglo Asian Mining's Earnings Growth And 15% ROE

At first glance, Anglo Asian Mining seems to have a decent ROE. Even when compared to the industry average of 17% the company's ROE looks quite decent. This certainly adds some context to Anglo Asian Mining's exceptional 43% net income growth seen over the past five years. However, there could also be other drivers 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.

As a next step, we compared Anglo Asian Mining's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 21%.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Anglo Asian Mining fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Anglo Asian Mining Making Efficient Use Of Its Profits?

Anglo Asian Mining's three-year median payout ratio is a pretty moderate 48%, meaning the company retains 52% of its income. So it seems that Anglo Asian Mining is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Anglo Asian Mining is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

In total, we are pretty happy with Anglo Asian Mining's 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 substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard will have the 1 risk we have identified for Anglo Asian Mining.

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.

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