Simply Wall St
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Strategic Minerals (LON:SML) has had a rough three months with its share price down 11%. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Strategic Minerals’ 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Strategic Minerals is:
29% = US$1.4m ÷ US$5.0m (Based on the trailing twelve months to December 2024).
The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each £1 of shareholders’ capital it has, the company made £0.29 in profit.
Check out our latest analysis for Strategic Minerals
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 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.
To begin with, Strategic Minerals has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 13% the company’s ROE is quite impressive. Needless to say, we are quite surprised to see that Strategic Minerals’ net income shrunk at a rate of 63% over the past five years. We reckon that there could be some other factors at play here that are preventing the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
That being said, we compared Strategic Minerals’ performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 8.8% in the same 5-year period.
