Most readers would already be aware that Wheaton Precious Metals’ (TSE:WPM) stock increased significantly by 21% over the past month. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Wheaton Precious Metals’ ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Wheaton Precious Metals
How To Calculate Return On Equity?
Return on equity 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 Wheaton Precious Metals is:
7.7% = US$538m ÷ US$7.0b (Based on the trailing twelve months to December 2023).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.08 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
Wheaton Precious Metals’ Earnings Growth And 7.7% ROE
At first glance, Wheaton Precious Metals’ ROE doesn’t look very promising. Yet, a closer study shows that the company’s ROE is similar to the industry average of 9.5%. Particularly, the exceptional 23% net income growth seen by Wheaton Precious Metals over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as – high earnings retention or an efficient management in place.
We then compared Wheaton Precious Metals’ net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 29% in the same 5-year period, which is a bit concerning.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Wheaton Precious Metals fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Wheaton Precious Metals Using Its Retained Earnings Effectively?
The three-year median payout ratio for Wheaton Precious Metals is 37%, which is moderately low. The company is retaining the remaining 63%. So it seems that Wheaton Precious Metals is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.
Additionally, Wheaton Precious Metals has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 48% over the next three years. Despite the higher expected payout ratio, the company’s ROE is not expected to change by much.
Summary
In total, it does look like Wheaton Precious Metals has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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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.