Declining Stock and Decent Financials: Is The Market Wrong About Evolution Mining Limited (ASX:EVN)?

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With its stock down 36% over the past three months, it is easy to disregard Evolution Mining (ASX:EVN). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Evolution Mining’s ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Check out our latest analysis for Evolution Mining

How To 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 Evolution Mining is:

9.9% = AU$323m ÷ AU$3.3b (Based on the trailing twelve months to June 2022).

The ‘return’ is the yearly profit. That means that for every A$1 worth of shareholders’ equity, the company generated A$0.10 in profit.

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 Evolution Mining’s Earnings Growth And 9.9% ROE

At first glance, Evolution Mining seems to have a decent ROE. Be that as it may, the company’s ROE is still quite lower than the industry average of 17%. Evolution Mining was still able to see a decent net income growth of 7.9% over the past five years. So, there might be other aspects that are positively influencing 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. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So this also does lend some color to the fairly high earnings growth seen by the company.

As a next step, we compared Evolution Mining’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 27% in the same period.

past-earnings-growth

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 Evolution Mining’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Evolution Mining Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 71% (or a retention ratio of 29%) for Evolution Mining suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.

Besides, Evolution Mining has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 57% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

Overall, we feel that Evolution Mining certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely achieved by the company reinvesting its earnings at a decent rate of return. Still, its earnings retention is quite low, so we wonder if the company’s growth could be higher, were it to pay out less dividends and retain more of its profits? With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. 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.

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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