Is Weakness In Royal Gold, Inc. (NASDAQ:RGLD) Stock A Sign That The Market Could be Wrong Given Its Strong Financial

With its stock down 26% over the past three months, it is easy to disregard Royal Gold (NASDAQ:RGLD). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Royal Gold’s 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Royal Gold

How Do You 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 Royal Gold is:

11% = US$289m ÷ US$2.6b (Based on the trailing twelve months to March 2022).

The ‘return’ is the yearly profit. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.11.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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 Royal Gold’s Earnings Growth And 11% ROE

To start with, Royal Gold’s ROE looks acceptable. Yet, the fact that the company’s ROE is lower than the industry average of 21% does temper our expectations. Still, we can see that Royal Gold has seen a remarkable net income growth of 40% over the past five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the high earnings growth seen by the company.

We then compared Royal Gold’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 24% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. What is RGLD worth today? The intrinsic value infographic in our free research report helps visualize whether RGLD is currently mispriced by the market.

Is Royal Gold Efficiently Re-investing Its Profits?

Royal Gold has a three-year median payout ratio of 33% (where it is retaining 67% of its income) which is not too low or not too high. So it seems that Royal Gold is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.

Moreover, Royal Gold is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. 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 32%. However, Royal Gold’s future ROE is expected to decline to 7.4% despite there being not much change anticipated in the company’s payout ratio.

Summary

On the whole, we feel that Royal Gold’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.