Pan American Silver Corp.’s (TSE:PAAS) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock? – Simply Wall St

Pan American Silver (TSE:PAAS) has had a rough week with its share price down 3.7%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Pan American Silver’s ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

See our latest analysis for Pan American Silver

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Pan American Silver is:

9.6% = US$253m ÷ US$2.6b (Based on the trailing twelve months to September 2021).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CA$1 of shareholders’ capital it has, the company made CA$0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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.

Pan American Silver’s Earnings Growth And 9.6% ROE

To begin with, Pan American Silver seems to have a respectable ROE. Yet, the fact that the company’s ROE is lower than the industry average of 15% does temper our expectations. However, we are pleased to see the impressive 22% net income growth reported by Pan American Silver over the past five years. We reckon that there could be other factors at play here. Such as – high earnings retention or an efficient management in place. 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.

Next, on comparing with the industry net income growth, we found that Pan American Silver’s reported growth was lower than the industry growth of 31% in the same period, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for PAAS? You can find out in our latest intrinsic value infographic research report.

Is Pan American Silver Using Its Retained Earnings Effectively?

Pan American Silver has a three-year median payout ratio of 25% (where it is retaining 75% of its income) which is not too low or not too high. So it seems that Pan American Silver 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, Pan American Silver 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. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 21% of its profits over the next three years. Accordingly, forecasts suggest that Pan American Silver’s future ROE will be 8.9% which is again, similar to the current ROE.

Summary

On the whole, we do feel that Pan American Silver has some positive attributes. In particular, it’s great to see that the company is investing heavily into its business and along with a moderate rate of return, that has resulted in a respectable growth in its earnings. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.