Is there a clear direction for the stock?

Shares of Kinross Gold (TSE:K) are up 8.0% in the last three months. However, the company’s financials look a bit inconsistent and market performance is ultimately driven by long-term fundamentals, meaning the stock could go either way. We will pay particular attention to it Kinross Golds ROE today.

ROE or return on equity is a useful tool for assessing how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it shows how successful the company is in converting shareholder investments into profits.

Check out our latest analysis for Kinross Gold

How is ROE calculated?

Return on equity can be calculated using the formula:

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

So, based on the above formula, the ROE for Kinross Gold is:

3.3% = $200 million ÷ $6.1 billion (based on trailing twelve months to June 2023).

The ‘return’ refers to a company’s profit over the past year. One way to conceptualize this is that for every CA$1 of shareholder capital it has, the company made CA$0.03 in profit.

Why is ROE important for earnings growth?

So far we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or ‘retains’ for future growth, which then gives us an idea about the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones with a higher growth rate compared to companies that don’t have the same features.

Kinross Gold earnings growth and 3.3% ROE

It’s quite clear that Kinross Gold’s ROE is quite low. Even compared to the industry average of 10.0%, the ROE figure is quite disappointing. Therefore, it might not be wrong to say that Kinross Gold’s five-year decline in net income of 6.6% may have been a result of its lower return on equity. We think that other factors may also play a role here. For example, the company has a very high payout ratio, or is facing competitive pressure.

The story continues

That said, we compared Kinross Gold’s performance against the industry and were concerned to find that while the company has shrunk its profits, the industry has grown its profits by 31% over the same five-year period.

Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing this, they will get an idea if the stock is headed to clear blue waters or if swampy waters await. A good indicator of expected earnings growth is the price/earnings ratio, which determines the price the market is willing to pay for a stock based on its earnings prospects. So maybe you want that check if Kinross Gold is trading at a high price-to-earnings ratio or a low price-to-earnings ratioin relation to its sector.

Is Kinross Gold using its profits efficiently?

Kinross Gold’s low three-year average payout ratio of 12% (or an 88% retention ratio) over the past three years should mean the company is retaining most of its earnings to fuel its growth, but the company’s earnings are actually shrunk. The low payout should mean that the company retains most of its profits and should therefore see some growth. Other factors may therefore play a role that could potentially hinder growth. For example, the company has faced headwinds.

Furthermore, Kinross Gold has paid dividends for at least a decade, meaning the company’s management is committed to paying dividends even if it means little to no earnings growth. Our latest analyst data shows that the company’s future payout ratio is expected to rise to 51% over the next three years. Despite the higher expected payout ratio, the company’s ROE is not expected to change much.

Resume

Overall, we have mixed feelings about Kinross Gold. Although the company has a high level of profit retention, the low returns are likely to hinder earnings growth. That said, the latest forecasts from industry analysts show that analysts expect a huge improvement in the company’s earnings growth. Are these analyst expectations based on broad industry expectations, or on the company’s fundamentals? Click here to visit our analysts’ forecast page for the company.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.