Declining Stock and Solid Fundamentals: Is The Market Wrong About Steppe Gold Ltd. (TSE:STGO)?
With its stock down 24% over the past three months, it is easy to disregard Steppe Gold (TSE:STGO). 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. In this article, we decided to focus on Steppe Gold's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Steppe Gold
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Steppe Gold is:
48% = US$22m ÷ US$45m (Based on the trailing twelve months to June 2023).
The 'return' is the income the business earned over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.48 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
Steppe Gold's Earnings Growth And 48% ROE
To begin with, Steppe Gold has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 9.9% the company's ROE is quite impressive. As a result, Steppe Gold's exceptional 26% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Steppe Gold's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 30% in the same period.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Steppe Gold's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Steppe Gold Making Efficient Use Of Its Profits?
Steppe Gold 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 are quite pleased with Steppe Gold'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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
