Most readers will already be aware that AltynGold (LON:ALTN) shares have risen 58% over the past three months. With the market rewarding strong financials over the long term, we wonder if that is the case here too. In particular, we have chosen to examine AltynGold’s return on equity in this article.

Return on equity, or ROE, is an important factor for a shareholder to consider as it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company relative to its equity.

Check out our latest analysis for AltynGold

How do you calculate return on equity?

The Formula for return on equity Is:

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

Based on the above formula, the ROE for AltynGold is:

16% = $11 million ÷ $71 million (based on the trailing twelve months ending December 2023).

The ‘return’ refers to a company’s earnings over the last year. This means that for every pound of equity the company earned £0.16 in profit.

Why is return on equity (ROE) important for earnings growth?

So far, we’ve learned that return on equity is a measure of a company’s profitability. Depending on how much of those profits the company reinvests or “retains” and how effectively it does so, we can judge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the return on equity and earnings retention, the higher a company’s growth rate will be compared to companies that don’t necessarily have those characteristics.

AltynGold’s earnings growth and 16% ROE

First of all, AltynGold appears to have a respectable return on equity. Moreover, the company’s return on equity compares quite favorably to the industry average of 9.6%. This certainly adds some context to AltynGold’s exceptional net income growth of 48% over the past five years. However, there could be other reasons for this growth, such as high retained earnings or efficient management.

We then compared AltynGold’s net profit growth with that of the industry and are pleased to note that the company’s growth rate is higher than that of the industry, which recorded a growth rate of 13% over the same 5-year period.

Earnings growth is an important factor in stock valuation. Next, investors need to determine if the expected earnings growth, or lack thereof, is already factored into the stock price. This then helps them determine if the stock is positioned for a good or bad future. If you’re wondering about AltynGold’s valuation, check out this indicator of its price-to-earnings ratio compared to the industry.

The story continues

Does AltynGold use its profits efficiently?

AltynGold does not pay regular dividends to its shareholders, which means that the company has reinvested all its profits into the business. This is probably the reason for the high earnings growth discussed above.

Diploma

Overall, we think AltynGold’s performance has been quite good. In particular, it’s great to see that the company is investing heavily in its business and this has resulted in considerable earnings growth alongside a high rate of return. If the company continues to grow its earnings as it has done so far, this could have a positive impact on its share price as earnings per share influence long-term share prices. Remember that the price of a stock also depends on the perceived risk, so investors need to educate themselves on the risks involved before investing in a company. To learn about the 3 risks we have identified for AltynGold, visit our risk dashboard for free.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.