Silver Lake Resources Limited’s (ASX:SLR) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Silver Lake Resources”s (ASX:SLR) stock is up by a considerable 28% over the past month. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Silver Lake Resources’ ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Silver Lake Resources

How Is ROE Calculated?

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 Silver Lake Resources is:

8.1% = AU$47m ÷ AU$583m (Based on the trailing twelve months to December 2019).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders’ capital it has, the company made A$0.08 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

A Side By Side comparison of Silver Lake Resources’ Earnings Growth And 8.1% ROE

When you first look at it, Silver Lake Resources’ ROE doesn’t look that attractive. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 11%. However, we we’re pleasantly surprised to see that Silver Lake Resources grew its net income at a significant rate of 81% in the last five years. So, there might be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

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

ASX:SLR Past Earnings Growth May 13th 2020
ASX:SLR Past Earnings Growth May 13th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Silver Lake Resources”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Silver Lake Resources Using Its Retained Earnings Effectively?

Given that Silver Lake Resources doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, it does look like Silver Lake Resources has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.