Should Weakness in Silver Lake Resources Limited’s (ASX:SLR) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
With its stock down 19% over the past month, it is easy to disregard Silver Lake Resources (ASX:SLR). 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 Silver Lake Resources’ ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Silver Lake Resources
How To 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 Silver Lake Resources is:
1.8% = AU$18m ÷ AU$1.0b (Based on the trailing twelve months to December 2022).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.02.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
Silver Lake Resources’ Earnings Growth And 1.8% ROE
It is quite clear that Silver Lake Resources’ ROE is rather low. Even compared to the average industry ROE of 16%, the company’s ROE is quite dismal. In spite of this, Silver Lake Resources was able to grow its net income considerably, at a rate of 23% in the last five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. Such as – high earnings retention or an efficient management in place.
We then compared Silver Lake Resources’ net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 29% in the same period, which is a bit concerning.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Silver Lake Resources is trading on a high P/E or a low P/E, relative to its industry.
Is Silver Lake Resources Making Efficient Use Of Its Profits?
Silver Lake Resources doesn’t pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.
Summary
Overall, we feel that Silver Lake Resources certainly does have some positive factors to consider. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
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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.
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