Evolution Mining Limited's (ASX:EVN) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?
Most readers would already be aware that Evolution Mining's (ASX:EVN) stock increased significantly by 10% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Evolution Mining's 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Evolution Mining
How Do You Calculate Return On Equity?
Return on equity 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 Evolution Mining is:
5.0% = AU$164m ÷ AU$3.3b (Based on the trailing twelve months to June 2023).
The 'return' is the profit 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$0.05.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Evolution Mining's Earnings Growth And 5.0% ROE
At first glance, Evolution Mining's ROE doesn't look very promising. Next, when compared to the average industry ROE of 10%, the company's ROE leaves us feeling even less enthusiastic. Accordingly, Evolution Mining's low net income growth of 2.0% over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Evolution Mining's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 23% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Evolution Mining's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Evolution Mining Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 59% (that is, the company retains only 41% of its income) over the past three years for Evolution Mining suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.
Moreover, Evolution Mining has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 44% over the next three years. As a result, the expected drop in Evolution Mining's payout ratio explains the anticipated rise in the company's future ROE to 13%, over the same period.
Summary
On the whole, Evolution Mining's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. 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 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.
