Barrick Gold (TSE:ABX) has experienced a decline of 4.4% in its share price this week. To understand the factors contributing to this price drop, we delved into the company’s financials, with a specific focus on its return on equity (ROE).
How Do You Calculate Return On Equity?
Return on Equity (ROE) is a key metric used to evaluate how efficiently a company can generate returns on the investment provided by its shareholders. By analyzing the company’s profitability in relation to its equity capital, we gain insights into its financial health.
Based on the ROE formula, Barrick Gold’s current ROE stands at 6.7%, calculated as US$2.2b ÷ US$32b (trailing twelve months to March 2024). This indicates that for every CA$1 of shareholder investment, the company generates a profit of CA$0.07.
Why Is ROE Important For Earnings Growth?
ROE serves as a measure of how effectively a company is utilizing its profits to generate further earnings. Companies with higher ROE and profit retention generally exhibit stronger growth potential compared to those with lower metrics.
A Side By Side Comparison of Barrick Gold’s Earnings Growth And 6.7% ROE
When comparing Barrick Gold’s 6.7% ROE to the industry average of 8.5%, the company falls below expectations. The decline in net income over five years may be attributed to its lower ROE, alongside other factors like a high payout ratio or competitive pressures.
Despite Barrick Gold’s earnings decline, industry data reveals a contrasting trend with a 29% growth rate in earnings. This divergence raises concerns about the company’s performance relative to its peers.
Is Barrick Gold Using Its Retained Earnings Effectively?
Barrick Gold’s decline in earnings despite retaining a substantial portion (65%) of profits suggests other underlying issues impacting its growth potential. The company’s consistent dividend payments over the years indicate a focus on shareholder returns over earnings growth.
Analyst estimates project an anticipated rise in Barrick Gold’s future ROE to 8.3%, indicating a potential turnaround in profitability despite the steady payout ratio.
Summary
Barrick Gold presents a mixed outlook, with low ROE signaling potential inefficiencies in reinvestment strategies despite profit retention. The company’s earnings growth trajectory contrasts industry projections, raising questions about its competitive positioning.
Valuation is complex, but we’re helping make it simple.
Explore comprehensive analysis on Barrick Gold to assess potential over or undervaluation, including fair value estimates, risks, dividends, insider transactions, and financial health.
Concerned about the content of this article? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article provides a general analysis of Barrick Gold’s financials based on historical data and analyst forecasts, offering insights into the company’s performance. It is not a recommendation for investment decisions and does not consider individual financial circumstances. The analysis aims to provide objective insights for long-term evaluation.
Insightful Analysis:
By comparing Barrick Gold’s ROE to industry averages and considering its earnings growth trajectory, investors can gauge the company’s position in the market and make informed decisions about its future performance. Additionally, assessing how effectively Barrick Gold utilizes its retained earnings offers valuable insights into its strategic priorities and potential for sustainable growth. By recognizing key factors influencing the company’s profitability, investors can better understand the dynamics shaping its valuation and competitive standing within the industry.
