Beacon Minerals (ASX:BCN) shares have risen 9.7% in the past three months. Since the market rewards strong long-term financials, we wonder if that’s the case here. Specifically, we decided to study beacon minerals ROE in this article.
Return on equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability index that measures the rate of return on the capital contributed by the company’s shareholders.
How to calculate return on capital?
The ROE formula it is:
Return on equity = Net income (from continuing operations) ÷ Stockholders’ equity
So, based on the above formula, Beacon Minerals’ ROE is:
28% = A$15 million ÷ A$55 million (based on the last twelve months to December 2021).
The ‘yield’ is the amount earned after tax during the last twelve months. So this means that for every Australian dollar of its shareholders’ investments, the company generates a profit of 0.28 Australian dollars.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Based on how much of your earnings the company chooses to reinvest or “retain,” we can assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with a high return on capital and earnings retention have a higher growth rate than companies that do not share these attributes.
Beacon Minerals earnings growth and 28% ROE
For starters, Beacon Minerals has a pretty high ROE, which is interesting. Also, the company’s ROE is higher compared to the industry average of 16%, which is quite remarkable. Given the circumstances, a sizeable 55% growth in net income for Beacon Minerals in five years was to be expected.
We then compare Beacon Minerals’ net income growth to the industry and are pleased to see that the company’s growth figure is higher compared to the industry, which has a 25% growth rate in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, whichever is the case, is included in the price. This helps them determine if the stock is poised 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 prospects. So you might want check if Beacon Minerals is trading at a high P/E or a low P/Ein relation to your industry.
Is Beacon Minerals making efficient use of its profits?
Beacon Minerals’ three-year average payout ratio is a fairly moderate 39%, meaning the company retains 61% of its revenue. So it appears that Beacon Minerals is reinvesting efficiently in a way that sees impressive earnings growth (discussed above) and pays a dividend that is well covered.
In addition to seeing earnings growth, Beacon Minerals recently began paying dividends. It is quite possible that the company was looking to impress its shareholders.
Overall, we are quite satisfied with the performance of Beacon Minerals. In particular, it is great to see that the company is investing heavily in its business and, coupled with a high rate of return, has resulted in considerable growth in profits. If the company continues to grow its earnings the way it has, that could have a positive impact on its stock price given how earnings per share influence stock prices in the long run. Remember, the price of a stock also depends on perceived risk. Therefore, investors should keep themselves informed about the risks involved before investing in any company. You can view the 3 risks we have identified for Beacon Minerals by visiting our risk dashboard free on our platform here.
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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 as financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.