Agnico Eagle Mines Limited's (NYSE:AEM) Stock Is Going Strong: Is the Market Following Fundamentals?

By
Simply Wall St
Published
January 05, 2022
NYSE:AEM
Source: Shutterstock

Agnico Eagle Mines (NYSE:AEM) has had a great run on the share market with its stock up by a significant 8.9% over the last month. 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 Agnico Eagle Mines' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Agnico Eagle Mines

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Agnico Eagle Mines is:

11% = US$645m ÷ US$5.9b (Based on the trailing twelve months to September 2021).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Agnico Eagle Mines' Earnings Growth And 11% ROE

At first glance, Agnico Eagle Mines seems to have a decent ROE. Even so, when compared with the average industry ROE of 20%, we aren't very excited. That being the case, the significant five-year 31% net income growth reported by Agnico Eagle Mines comes as a pleasant surprise. Therefore, there could be other causes behind this 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. 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.

We then compared Agnico Eagle Mines' 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 15% in the same period.

past-earnings-growth
NYSE:AEM Past Earnings Growth January 5th 2022

Earnings growth is an important metric to consider when valuing a stock. 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. Is Agnico Eagle Mines fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Agnico Eagle Mines Efficiently Re-investing Its Profits?

The three-year median payout ratio for Agnico Eagle Mines is 34%, which is moderately low. The company is retaining the remaining 66%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Agnico Eagle Mines is reinvesting its earnings efficiently.

Besides, Agnico Eagle Mines has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 44% over the next three years. Regardless, the future ROE for Agnico Eagle Mines is speculated to rise to 14% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

Overall, we are quite pleased with Agnico Eagle Mines' 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. 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.

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