Is Aurelia Metals Limited’s (ASX:AMI) Latest Stock Performance A Reflection Of Its Financial Health?

Aurelia Metals (ASX:AMI) has had a great run on the share market with its stock up by a significant 75% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Aurelia Metals’ ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Aurelia Metals

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Aurelia Metals is:

11% = AU$25m ÷ AU$220m (Based on the trailing twelve months to December 2019).

The ‘return’ is the income the business earned over the last year. That means that for every A$1 worth of shareholders’ equity, the company generated A$0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

Aurelia Metals’ Earnings Growth And 11% ROE

To begin with, Aurelia Metals seems to have a respectable ROE. Further, the company’s ROE is similar to the industry average of 12%. This certainly adds some context to Aurelia Metals’ exceptional 60% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Aurelia Metals’ growth is quite high when compared to the industry average growth of 38% in the same period, which is great to see.

past-earnings-growth
ASX:AMI Past Earnings Growth July 26th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is AMI fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Aurelia Metals Efficiently Re-investing Its Profits?

Aurelia Metals has a significant three-year median payout ratio of 57%, meaning the company only retains 43% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

While Aurelia Metals has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 29% over the next three years. The fact that the company’s ROE is expected to rise to 23% over the same period is explained by the drop in the payout ratio.

Summary

In total, we are pretty happy with Aurelia Metals’ performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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