Alkane Resources Limited's (ASX:ALK) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

By
Simply Wall St
Published
February 18, 2022
ASX:ALK
Source: Shutterstock

Alkane Resources' (ASX:ALK) stock is up by a considerable 12% over the past week. 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. Specifically, we decided to study Alkane Resources' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Alkane Resources

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Alkane Resources is:

18% = AU$34m ÷ AU$192m (Based on the trailing twelve months to June 2021).

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$0.18 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Alkane Resources' Earnings Growth And 18% ROE

To begin with, Alkane Resources seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 13%. This probably laid the ground for Alkane Resources' significant 46% net income growth seen over the past five years. However, there could also be other causes 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 Alkane Resources' growth is quite high when compared to the industry average growth of 23% in the same period, which is great to see.

past-earnings-growth
ASX:ALK Past Earnings Growth February 18th 2022

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One 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 may want to check if Alkane Resources is trading on a high P/E or a low P/E, relative to its industry.

Is Alkane Resources Making Efficient Use Of Its Profits?

Given that Alkane 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

Overall, we are quite pleased with Alkane Resources' performance. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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