Are Robust Financials Driving The Recent Rally In Roxgold Inc.'s (TSE:ROXG) Stock?

Most readers would already be aware that Roxgold's (TSE:ROXG) stock increased significantly by 55% over the past three months. 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. In this article, we decided to focus on Roxgold's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Roxgold

How To Calculate Return On Equity?

ROE 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 Roxgold is:

13% = US$29m ÷ US$216m (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.13 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Roxgold's Earnings Growth And 13% ROE

To begin with, Roxgold seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 15%. This certainly adds some context to Roxgold's exceptional 24% net income growth seen over the past five years. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing Roxgold's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 29% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Roxgold's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Roxgold Efficiently Re-investing Its Profits?

Conclusion

Overall, we are quite pleased with Roxgold's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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