Profit ratio

Could the market be wrong about Capricorn Metals Ltd (ASX:CMM) given its attractive financial outlook?

Capricorn Metals Inc (ASX:CMM) had a tough three months with its share price down 6.5%. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In particular, we’ll be paying attention to Capricorn Metals’ ROE today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Capricorn Metals

How do you calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

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

24% = AU$49 million ÷ AU$205 million (based on trailing 12 months to December 2021).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every Australian dollar of share capital it has, the company has made a profit of 0.24 Australian dollars.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Capricorn Metals earnings growth and ROE of 24%

First, we recognize that Capricorn Metals has a significantly high ROE. Second, even when compared to the industry average of 16%, the company’s ROE is quite impressive. This likely laid the foundation for Capricorn Metals’ moderate 16% net income growth over the past five years.

Then, when comparing with industry net income growth, we found that Capricorn Metals’ reported growth was lower than industry growth by 26% over the same period, which we don’t like. no see.

ASX: CMM Past Earnings Growth June 9, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Capricorn Metals’ valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Does Capricorn Metals Use Retained Earnings Effectively?

Capricorn Metals currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the decent number of earnings growth we discussed above.

Summary

Overall, we’re pretty happy with Capricorn Metals’ performance. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. As a result, its decent revenue growth is not surprising. Looking at current analyst estimates, we found that analysts expect the company to continue its recent growth streak. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.