Is Wesdome Gold Mines Ltd.'s (TSE:WDO) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
November 24, 2021
TSX:WDO
Source: Shutterstock

Wesdome Gold Mines' (TSE:WDO) stock is up by a considerable 13% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Wesdome Gold Mines' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Wesdome Gold Mines

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 Wesdome Gold Mines is:

31% = CA$119m ÷ CA$378m (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.31.

What Is The Relationship Between ROE And Earnings Growth?

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

Wesdome Gold Mines' Earnings Growth And 31% ROE

To begin with, Wesdome Gold Mines has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. So, the substantial 57% net income growth seen by Wesdome Gold Mines over the past five years isn't overly surprising.

As a next step, we compared Wesdome Gold Mines' 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:WDO Past Earnings Growth November 24th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Wesdome Gold Mines is trading on a high P/E or a low P/E, relative to its industry.

Is Wesdome Gold Mines Using Its Retained Earnings Effectively?

Wesdome Gold Mines 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

On the whole, we feel that Wesdome Gold Mines' performance has been quite good. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

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.

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