Centamin plc’s (LON:CEY) financials are too murky to relate to current share price momentum: what’s in store for the stock?

Centamin (LON:CEY) stock is up 8.7% over the past month. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In particular, we will pay attention to the ROE of Centamin today.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Centamin

How is ROE calculated?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for Centamin is:

12% = $154 million ÷ $1.3 billion (based on trailing 12 months to December 2021).

The “yield” is the amount earned after tax over the last twelve months. Another way to think about this is that for every £1 of equity, the company was able to make a profit of £0.12.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Centamin earnings growth and ROE of 12%

For starters, Centamin seems to have a respectable ROE. Even when compared to the industry average of 14%, the company’s ROE looks pretty decent. However, we are curious how Centamin’s decent returns have still resulted in stable growth for Centamin over the past five years. Thus, there could be other aspects that could potentially impede the growth of the business. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.

We then benchmarked Centamin’s net revenue growth with the industry and found that the industry average growth rate was 18% over the same period.

LSE: CEY Past Earnings Growth August 2, 2022

Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is Centamin correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Centamin effectively use its retained earnings?

Centamin has a high three-year median payout ratio of 96% (or a retention rate of 3.9%), meaning the company pays out most of its earnings as dividends to its shareholders. This partly explains why there has been no growth in its profits.

Additionally, Centamin has paid dividends over an eight-year period, meaning the company’s management is committed to paying dividends even if it means little or no earnings growth. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 64% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change much.

Conclusion

Overall, we believe that the performance shown by Centamin can be open to many interpretations. Despite the high ROE, the company did not see any growth in earnings as it paid out most of its earnings in the form of dividends, with almost nothing to invest in its own business. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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

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