Does this require a more in-depth study of its financial prospects?

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Most readers will already know that shares of Silver Lake Resources (ASX:SLR) are up a significant 18% over the past week. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . We will pay particular attention to Silver Lake Resources’ RE today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for Silver Lake Resources

How do you calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Silver Lake Resources is:

7.4% = AU$78 million ÷ AU$1.1 billion (based on trailing 12 months to June 2022).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every Australian dollar of share capital it has, the company has made a profit of 0.07 Australian dollars.

Why is ROE important for earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of Silver Lake Resources earnings growth and 7.4% ROE

At first glance, Silver Lake Resources’ ROE isn’t much to tell. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 16%. Despite this, surprisingly, Silver Lake Resources has experienced exceptional net income growth of 41% over the past five years. We believe there could be other factors at play here. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

As a next step, we benchmarked Silver Lake Resources’ net income growth against the industry, and fortunately found that the growth the company saw was above the industry average growth of 33%.

past earnings-growth

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. Is Silver Lake Resources correctly valued relative to other companies? These 3 recovery measures might help you decide.

Does Silver Lake Resources effectively reinvest its profits?

Silver Lake Resources currently pays no dividends, which essentially means that it has reinvested all of its earnings back into the business. This certainly contributes to the high earnings growth number we discussed above.

Conclusion

All in all, it seems that Silver Lake Resources has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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