Shares of Silver Lake Resources Limited (ASX:SLR) are on a bullish trend: Are strong financials guiding the market?

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Silver Lake Resources (ASX:SLR) stock is up 13% in 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. In particular, we’ll be paying attention to Silver Lake Resources’ ROE today.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for Silver Lake Resources

How do you calculate return on equity?

the return on equity formula East:

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 “yield” is the profit of the last twelve months. One way to conceptualize this is that for every Australian dollar of share capital it has, the company has made a profit of 0.11 Australian dollars.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

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%. Consequently, this likely laid the foundation for the impressive 69% net income growth seen over the past five years by Silver Lake Resources. We believe that there could also be other aspects that positively influence the company’s earnings growth. Such as – high revenue retention or effective management in place.

We then compared Silver Lake Resources net income growth with the industry and we are pleased to see that the company growth figure is higher compared to the industry which has a growth rate of 24% during the same period.

ASX: SLR Past Earnings Growth January 21, 2022

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 then helps them determine if the stock is positioned for a bright or bleak future. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Silver Lake Resources is trading on a high P/E or a low P/E, relative to its industry.

Does Silver Lake Resources Use Retained Earnings Effectively?

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.

Summary

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 together with a high rate of return, this has led to significant 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.

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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