Most readers would already be aware that Wheaton Precious Metals' (TSE:WPM) stock increased significantly by 12% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Wheaton Precious Metals' ROE today.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Wheaton Precious Metals is:
9.9% = US$575m ÷ US$5.8b (Based on the trailing twelve months to March 2021).
The 'return' is the amount earned after tax 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$0.10.
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. 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.
A Side By Side comparison of Wheaton Precious Metals' Earnings Growth And 9.9% ROE
At first glance, Wheaton Precious Metals seems to have a decent ROE. Even so, when compared with the average industry ROE of 15%, we aren't very excited. However, we are pleased to see the impressive 37% net income growth reported by Wheaton Precious Metals over the past five years. Therefore, there could be other causes behind this growth. Such as - high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the high earnings growth seen by the company.
Next, on comparing with the industry net income growth, we found that Wheaton Precious Metals' growth is quite high when compared to the industry average growth of 29% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Wheaton Precious Metals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Wheaton Precious Metals Efficiently Re-investing Its Profits?
Wheaton Precious Metals' three-year median payout ratio is a pretty moderate 48%, meaning the company retains 52% of its income. By the looks of it, the dividend is well covered and Wheaton Precious Metals is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Moreover, Wheaton Precious Metals 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 39%. Accordingly, forecasts suggest that Wheaton Precious Metals' future ROE will be 11% which is again, similar to the current ROE.
In total, we are pretty happy with Wheaton Precious Metals' performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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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