Barrick Gold (TSE:ABX) has had a rough week with its share price down 4.4%. We, however decided to study the company’s financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company’s financials. Specifically, we decided to study Barrick Gold’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Barrick Gold
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Barrick Gold is:
6.7% = US$2.2b ÷ US$32b (Based on the trailing twelve months to March 2024).
The ‘return’ is the income the business earned over the last year. So, this means that for every CA$1 of its shareholder’s investments, the company generates a profit of CA$0.07.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
A Side By Side comparison of Barrick Gold’s Earnings Growth And 6.7% ROE
When you first look at it, Barrick Gold’s ROE doesn’t look that attractive. Next, when compared to the average industry ROE of 8.5%, the company’s ROE leaves us feeling even less enthusiastic. Therefore, it might not be wrong to say that the five year net income decline of 10% seen by Barrick Gold was probably the result of it having a lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
However, when we compared Barrick Gold’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 29% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 ABX? You can find out in our latest intrinsic value infographic research report.
Is Barrick Gold Using Its Retained Earnings Effectively?
Despite having a normal three-year median payout ratio of 35% (where it is retaining 65% of its profits), Barrick Gold has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Moreover, Barrick Gold has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 39%. Regardless, the future ROE for Barrick Gold is predicted to rise to 8.3% despite there being not much change expected in its payout ratio.
Summary
Overall, we have mixed feelings about Barrick Gold. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. 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.