Are Strong Financial Prospects The Force That Is Driving The Momentum In Perseus Mining Limited's ASX:PRU) Stock?

Perseus Mining's (ASX:PRU) stock is up by a considerable 17% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Perseus Mining's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Perseus 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 Perseus Mining is:

17% = AU$280m ÷ AU$1.6b (Based on the trailing twelve months to June 2022).

The 'return' refers to a company's earnings over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.17 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. 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. 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.

Perseus Mining's Earnings Growth And 17% ROE

To begin with, Perseus Mining seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 16%. Consequently, this likely laid the ground for the impressive net income growth of 73% seen over the past five years by Perseus Mining. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Perseus Mining's growth is quite high when compared to the industry average growth of 33% in the same period, which is great to see.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Perseus Mining fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Perseus Mining Efficiently Re-investing Its Profits?

Perseus Mining has a really low three-year median payout ratio of 7.3%, meaning that it has the remaining 93% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Along with seeing a growth in earnings, Perseus Mining only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 13% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 13% over the same period.

Summary

In total, we are pretty happy with Perseus 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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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