SEMAFO Inc (TSX:SMF): What does the future look like?

Analysts covering SEMAFO Inc (TSX:SMF) are predicting the earnings to drop -0.3% in years’ time. But an investor should be more concerned about the long-term trend. Today I’m going research the future of this stock in more detail. See our latest analysis for SMF

Not very exciting times ahead

The one reason that investors are attracted to SMF is the high growth potential. Analysts are expecting earnings to raise anywhere from $0.13 to $0.24 over the next 3 years. I’m sure predictions like these make the current investors happy.

SEMAFO (TSX:SMF) Past Future Earnings Mar 8th 17
SEMAFO (TSX:SMF) Past Future Earnings Mar 8th 17

In the same period we will see the revenue jump from $303 Million to $610 Million in 2020 and profits (net income) are predicted to catapult from $40 M to $155 M in 2020, roughly growing 3.9x. Margins are predicted to be extremely healthy during this time as well.

Is there any basis for growth?

SEMAFO has grown its earnings faster than the Materials industry average over the past year.

SEMAFO’s Return on Equity of 7% leaves a lot to be desired and to make things worse this is below the industry average of 18.23%. The good news is that a slight improvement is on the cards with the level in a couple years rising to 15.2%.

SEMAFO (TSX:SMF) Future Perf Mar 8th 17
SEMAFO (TSX:SMF) Future Perf Mar 8th 17

Return on equity (ROE) is a measure of how much profit (net income) a company makes as a percentage of the shareholders equity. Equity is made up of funds from the original issuing of shares and any retained earnings from previous financial years. It varies considerably across sectors, for this reason it is important to asses a stocks ROE relative to its industry. Whilst it is true that the higher the ROE the better the company is performing, ROE does have a weakness. A stock with a disproportionate amount of debt can lead to a small equity base. Thus, a small amount of net income (the numerator) could still produce a high ROE off a modest equity base (the denominator). For this reason investors should always consider the debt situation in conjunction with ROE.

Conclusion

SEMAFO may have a few turbulent years in front of it but despite (or maybe because of) that it could still be offering an interesting investment opportunity. I recommend you see our latest FREE analysis to find out!

If you are not interested in SMF anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.