Stock Analysis

Amerigo Resources Ltd.'s (TSE:ARG) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

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TSX:ARG
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With its stock down 41% over the past three months, it is easy to disregard Amerigo Resources (TSE:ARG). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Amerigo Resources' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Amerigo Resources

How Do You 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 Amerigo Resources is:

21% = US$28m ÷ US$130m (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.21 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Amerigo Resources' Earnings Growth And 21% ROE

At first glance, Amerigo Resources seems to have a decent ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. This certainly adds some context to Amerigo Resources' exceptional 41% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Amerigo Resources' 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 28%.

past-earnings-growth
TSX:ARG Past Earnings Growth September 2nd 2022

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Amerigo Resources is trading on a high P/E or a low P/E, relative to its industry.

Is Amerigo Resources Making Efficient Use Of Its Profits?

Amerigo Resources' three-year median payout ratio is a pretty moderate 30%, meaning the company retains 70% of its income. By the looks of it, the dividend is well covered and Amerigo Resources is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Amerigo Resources is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, we are pretty happy with Amerigo 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Valuation is complex, but we're helping make it simple.

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About TSX:ARG

Amerigo Resources

Amerigo Resources Ltd., through its subsidiary, Minera Valle Central S.A., produces and sells copper and molybdenum concentrates from Codelco’s El Teniente underground mine in Chile.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation4
Future Growth5
Past Performance2
Financial Health5
Dividends4

Read more about these checks in the individual report sections or in our analysis model.

High growth potential with excellent balance sheet and pays a dividend.