Most readers already know that Silver Lake Resources (ASX: SLR) stock has risen significantly 24% over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In particular, we will be paying close attention to the ROE of Silver Lake Resources today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
See our latest review for Silver Lake Resources
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Silver Lake Resources is:
11% = A $ 98 million ÷ A $ 896 million (based on the last twelve months to June 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every Australian dollar of equity capital it has, the company has made a profit of AU $ 0.11.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Silver Lake Resources profit growth and 11% ROE
At first glance, Silver Lake Resources appears to have a decent ROE. Even compared to the industry average of 13%, the company’s ROE looks pretty decent. Therefore, this likely laid the groundwork for the impressive 69% net income growth seen over the past five years by Silver Lake Resources. However, other drivers could also be behind this growth. Such as – high profit retention or effective management in place.
In the next step, we compared the net income growth of Silver Lake Resources with the industry and luckily we found that the growth observed by the company is above the industry average growth of 24%. .
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. If you’re wondering how Silver Lake Resources is valued, check out this gauge of its price / earnings ratio, relative to its industry.
Is Silver Lake Resources Efficiently Using Its Retained Earnings?
Silver Lake Resources does not pay any dividends to its shareholders, which means the company has reinvested all of its profits in the business. This is probably what explains the high number of profit growth discussed above.
Overall, we are quite satisfied with the performance of Silver Lake Resources. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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