Silver Lake Resources Inc (ASX:SLR) has had a strong run in the equity market with a significant 33% rise in its shares over the past three months. Since the market usually pays for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could influence the market. 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 other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
How is ROE calculated?
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 for Silver Lake Resources is:
11% = AU$98 million ÷ AU$896 million (based on trailing 12 months to June 2021).
The “return” is the annual profit. This therefore means that for every A$1 of investment by its shareholder, the company generates a profit of A$0.11.
What does ROE have to do with 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. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Silver Lake Resources earnings growth and 11% ROE
For starters, Silver Lake Resources appears to have a respectable ROE. Additionally, the company’s ROE is similar to the industry average of 13%. This likely partly explains Silver Lake Resources’ significant 69% net income growth over the past five years, among other factors. We believe there could be other factors at play here as well. Such as – high revenue retention or effective management in place.
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 24%.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about Silver Lake Resources’ valuation, check out this gauge of its price/earnings ratio, relative to its industry.
Is Silver Lake Resources using its profits efficiently?
Silver Lake Resources does not pay any dividends to its shareholders, meaning the company has reinvested all of its earnings back into the business. This is probably what explains the strong earnings growth discussed above.
Overall, we are quite satisfied with the performance of Silver Lake Resources. In particular, it is good to see that the company is investing heavily in its business and, along with a high rate of return, this has resulted in significant growth in its profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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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.