Is Agnico Eagle Mines Limited's (NYSE:AEM) Recent Stock Performance Influenced By Its Fundamentals In Any Way?
Agnico Eagle Mines (NYSE:AEM) has had a great run on the share market with its stock up by a significant 24% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Agnico Eagle Mines' 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.
View our latest analysis for Agnico Eagle Mines
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Agnico Eagle Mines is:
10.0% = US$1.9b ÷ US$19b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.10 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. 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 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 Agnico Eagle Mines' Earnings Growth And 10.0% ROE
On the face of it, Agnico Eagle Mines' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 11%. Moreover, we are quite pleased to see that Agnico Eagle Mines' net income grew significantly at a rate of 55% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Agnico Eagle Mines' growth is quite high when compared to the industry average growth of 26% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for AEM? You can find out in our latest intrinsic value infographic research report.
Is Agnico Eagle Mines Efficiently Re-investing Its Profits?
Agnico Eagle Mines has a three-year median payout ratio of 45% (where it is retaining 55% of its income) which is not too low or not too high. So it seems that Agnico Eagle Mines is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Additionally, Agnico Eagle Mines has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 74% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 5.4%, over the same period.
Conclusion
In total, it does look like Agnico Eagle Mines has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
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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.
