Stock Analysis

Karora Resources Inc.'s (TSE:KRR) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

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TSX:KRR
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Most readers would already be aware that Karora Resources' (TSE:KRR) stock increased significantly by 67% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Karora Resources' ROE today.

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 the opportunities and risks within the CA Metals and Mining industry.

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 Karora Resources is:

2.0% = CA$6.5m ÷ CA$329m (Based on the trailing twelve months to September 2022).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.02 in profit.

What Has ROE Got To Do With 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.

Karora Resources' Earnings Growth And 2.0% ROE

As you can see, Karora Resources' ROE looks pretty weak. Even when compared to the industry average of 12%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Karora Resources grew its net income at a significant rate of 63% in the last five years. We believe that 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.

We then compared Karora Resources' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 31% in the same period.

past-earnings-growth
TSX:KRR Past Earnings Growth December 5th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Karora Resources fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Karora Resources Making Efficient Use Of Its Profits?

Karora Resources doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

Overall, we feel that Karora Resources certainly does have some positive factors to consider. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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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