The recent performance of Wesdome Gold Mines Ltd. (TSE: WDO) being driven by its attractive financial outlook?


Wesdome Gold Mines (TSE: WDO) stock has risen 13% in the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. Specifically, we have decided to study the ROE of Wesdome Gold Mines in this article.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

Check out our latest review for the Wesdome Gold Mines

How to calculate return on equity?

The formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, based on the above formula, the ROE of Wesdome Gold Mines is:

31% = 119 million Canadian dollars ÷ 378 million Canadian dollars (based on the last twelve months up to September 2021).

The “return” is the profit of the last twelve months. This therefore means that for every CA $ 1 invested by its shareholder, the company generates a profit of CA $ 0.31.

What is the relationship between ROE and profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

Wesdome Gold Mines profit growth and 31% ROE

For starters, Wesdome Gold Mines has a pretty high ROE, which is interesting. In addition, the company’s ROE is above the industry average by 15%, which is quite remarkable. Thus, the substantial growth in net income of 57% observed by Wesdome Gold Mines over the past five years is not too surprising.

As a next step, we compared the net income growth of Wesdome Gold Mines with the industry, and luckily, we found that the growth observed by the company is above the industry average growth by 28%.

TSX: WDO Past Earnings Growth November 24, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading for clear blue waters or swampy waters ahead. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check whether Wesdome Gold Mines is trading high P / E or low P / E, relative to its industry.

Is Wesdome Gold Mines Efficiently Using Its Retained Earnings?

Wesdome Gold Mines does not currently pay any dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high number of profit growth we discussed above.

Conclusion

Overall, we think the performance of Wesdome Gold Mines has been quite good. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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