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Osisko Gold Royalties Ltd's (TSE:OR) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

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Osisko Gold Royalties' (TSE:OR) stock is up by a considerable 21% 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. In this article, we decided to focus on Osisko Gold Royalties' ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Osisko Gold Royalties

How Do You 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 Osisko Gold Royalties is:

2.1% = CA$39m ÷ CA$1.9b (Based on the trailing twelve months to March 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.02.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Osisko Gold Royalties' Earnings Growth And 2.1% ROE

It is quite clear that Osisko Gold Royalties' ROE is rather low. Even when compared to the industry average of 17%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 43% seen by Osisko Gold Royalties was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

That being said, we compared Osisko Gold Royalties' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 29% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is OR worth today? The intrinsic value infographic in our free research report helps visualize whether OR is currently mispriced by the market.

Is Osisko Gold Royalties Efficiently Re-investing Its Profits?

Osisko Gold Royalties' declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its LTM (or last twelve month) payout ratio of 81% (or a retention ratio of 19%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 2 risks we have identified for Osisko Gold Royalties visit our risks dashboard for free.

Moreover, Osisko Gold Royalties has been paying dividends for seven years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 33% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 5.3%, over the same period.

Conclusion

On the whole, Osisko Gold Royalties' performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Osisko Gold Royalties' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

This article by Simply Wall St is general in nature. 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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