Agnico Eagle Mines Limited's (NYSE:AEM) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

By
Simply Wall St
Published
April 13, 2022
NYSE:AEM
Source: Shutterstock

Agnico Eagle Mines' (NYSE:AEM) stock is up by a considerable 24% 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. In this article, we decided to focus on Agnico Eagle Mines' ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Agnico Eagle Mines

How Do You 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 Agnico Eagle Mines is:

9.1% = US$543m ÷ US$6.0b (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.09 in profit.

What Has ROE Got To Do With 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. 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.

Agnico Eagle Mines' Earnings Growth And 9.1% ROE

On the face of it, Agnico Eagle Mines' ROE is not much to talk about. Next, when compared to the average industry ROE of 22%, the company's ROE leaves us feeling even less enthusiastic. Despite this, surprisingly, Agnico Eagle Mines saw an exceptional 31% net income growth over the past five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

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 23% in the same period.

past-earnings-growth
NYSE:AEM Past Earnings Growth April 13th 2022

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). Doing so will help them establish if the stock's future looks promising or ominous. What is AEM worth today? The intrinsic value infographic in our free research report helps visualize whether AEM is currently mispriced by the market.

Is Agnico Eagle Mines Using Its Retained Earnings Effectively?

Agnico Eagle Mines has a three-year median payout ratio of 34% (where it is retaining 66% of its income) which is not too low or not too high. So it seems that Agnico Eagle Mines is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Agnico Eagle Mines has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 88% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 6.6% over the same period.

Summary

In total, it does look like Agnico Eagle Mines has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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