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Will Teranga Gold Corporation (TSE:TGZ) Continue To Underperform Its Industry?

Teranga Gold Corporation’s (TSX:TGZ) most recent return on equity was a substandard 5.16% relative to its industry performance of 13.16% over the past year. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into TGZ’s past performance. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of TGZ’s returns. See our latest analysis for Teranga Gold

Breaking down ROE — the mother of all ratios

Return on Equity (ROE) weighs Teranga Gold’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.

Return on Equity = Net Profit Ă· Shareholders Equity

ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Teranga Gold, which is 17.87%. Since Teranga Gold’s return does not cover its cost, with a difference of -12.71%, this means its current use of equity is not efficient and not sustainable. Very simply, Teranga Gold pays more for its capital than what it generates in return. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin Ă— asset turnover Ă— financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

TSX:TGZ Last Perf May 17th 18
TSX:TGZ Last Perf May 17th 18

Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue Teranga Gold can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine Teranga Gold’s debt-to-equity level. Currently the debt-to-equity ratio stands at a low 2.38%, which means Teranga Gold still has headroom to take on more leverage in order to increase profits.

TSX:TGZ Historical Debt May 17th 18
TSX:TGZ Historical Debt May 17th 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Teranga Gold exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Although, its appropriate level of leverage means investors can be more confident in the sustainability of Teranga Gold’s return with a possible increase should the company decide to increase its debt levels. Although ROE can be a useful metric, it is only a small part of diligent research.

For Teranga Gold, I’ve put together three key factors you should further research:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Valuation: What is Teranga Gold worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Teranga Gold is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Teranga Gold? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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