Are Strong Financial Prospects The Force That Is Driving The Momentum In Ikwezi Mining Limited's ASX:IKW) Stock?

By
Simply Wall St
Published
March 21, 2022
ASX:IKW
Source: Shutterstock

Ikwezi Mining's (ASX:IKW) stock is up by a considerable 100% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Ikwezi Mining's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Ikwezi Mining

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Ikwezi Mining is:

33% = AU$10m ÷ AU$31m (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.33.

What Has ROE Got To Do With 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 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.

Ikwezi Mining's Earnings Growth And 33% ROE

Firstly, we acknowledge that Ikwezi Mining has a significantly high ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. As a result, Ikwezi Mining's exceptional 67% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Ikwezi Mining's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 26%.

past-earnings-growth
ASX:IKW Past Earnings Growth March 21st 2022

Earnings growth is a huge factor in stock valuation. 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. Is Ikwezi Mining fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ikwezi Mining Making Efficient Use Of Its Profits?

Given that Ikwezi Mining doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

On the whole, we feel that Ikwezi Mining's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for Ikwezi Mining by visiting our risks dashboard for free on our platform here.

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