Do Its Financials Have Any Role To Play In Driving Alamos Gold Inc.'s (TSE:AGI) Stock Up Recently?

Alamos Gold's (TSE:AGI) stock is up by a considerable 14% 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. Specifically, we decided to study Alamos Gold's 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 Alamos Gold

How To 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 Alamos Gold is:

6.5% = US$199m ÷ US$3.1b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.06 in profit.

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 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 Alamos Gold's Earnings Growth And 6.5% ROE

When you first look at it, Alamos Gold's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 9.6%, the company's ROE leaves us feeling even less enthusiastic. However, we we're pleasantly surprised to see that Alamos Gold grew its net income at a significant rate of 29% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Alamos Gold'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 23%.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Alamos Gold fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Alamos Gold Efficiently Re-investing Its Profits?

Alamos Gold has a really low three-year median payout ratio of 20%, meaning that it has the remaining 80% left over to reinvest into its business. So it looks like Alamos Gold is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Alamos Gold has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 8.6% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 8.6%, over the same period.

Conclusion

On the whole, we do feel that Alamos Gold has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.