In This Article:
With its stock down 6.4% over the past month, it is easy to disregard Northern Star Resources (ASX:NST). 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. In this article, we decided to focus on Northern Star Resources' ROE.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Northern Star Resources
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Northern Star Resources is:
2.5% = AU$201m ÷ AU$8.1b (Based on the trailing twelve months to December 2022).
The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.02 in profit.
What Has ROE Got To Do With 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 growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Northern Star Resources' Earnings Growth And 2.5% ROE
As you can see, Northern Star Resources' ROE looks pretty weak. Not just that, even compared to the industry average of 17%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Northern Star Resources saw an exceptional 29% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Northern Star Resources' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 35% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for NST? You can find out in our latest intrinsic value infographic research report.