Yahoo Finance Should Weakness in Great Northern Minerals Limited's (ASX:GNM) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
With its stock down 14% over the past three months, it is easy to disregard Great Northern Minerals (ASX:GNM). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Great Northern Minerals' ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Great Northern Minerals
How Do You Calculate Return On Equity?
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 Great Northern Minerals is:
58% = AU$1.4m ÷ AU$2.4m (Based on the trailing twelve months to June 2023).
The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.58 in profit.
Why Is ROE Important For 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. 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.
Great Northern Minerals' Earnings Growth And 58% ROE
First thing first, we like that Great Northern Minerals has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. However, we are curious as to how the high returns still resulted in a flat growth for Great Northern Minerals in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared Great Northern Minerals' net income growth with the industry and discovered that the industry saw an average growth of 24% 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. Doing so will help them establish if the stock's future looks promising or ominous. Is Great Northern Minerals fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Great Northern Minerals Using Its Retained Earnings Effectively?
Great Northern Minerals doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.
Summary
On the whole, we do feel that Great Northern Minerals has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on Great Northern Minerals and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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.
