Yahoo Finance Declining Stock and Solid Fundamentals: Is The Market Wrong About Anglo Asian Mining PLC (LON:AAZ)?
It is hard to get excited after looking at Anglo Asian Mining's (LON:AAZ) recent performance, when its stock has declined 5.0% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Anglo Asian Mining's 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 Anglo Asian Mining
How Is ROE Calculated?
Return on equity 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 Anglo Asian Mining is:
19% = US$23m ÷ US$122m (Based on the trailing twelve months to December 2020).
The 'return' is the income the business earned over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.19.
Why Is ROE Important For 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Anglo Asian Mining's Earnings Growth And 19% ROE
To start with, Anglo Asian Mining's ROE looks acceptable. Even when compared to the industry average of 16% the company's ROE looks quite decent. Consequently, this likely laid the ground for the impressive net income growth of 57% seen over the past five years by Anglo Asian Mining. We believe that there might also be other aspects that are positively influencing the company's earnings 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.
As a next step, we compared Anglo Asian Mining's 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 27%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Anglo Asian Mining's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Anglo Asian Mining Efficiently Re-investing Its Profits?
The three-year median payout ratio for Anglo Asian Mining is 47%, which is moderately low. The company is retaining the remaining 53%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Anglo Asian Mining is reinvesting its earnings efficiently.
Additionally, Anglo Asian Mining has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.
Conclusion
Overall, we are quite pleased with Anglo Asian Mining'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 1 risk we have identified for Anglo Asian Mining by visiting our risks dashboard for free on our platform here.
This article by Simply Wall St is general in nature. 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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