Could the market be wrong about Wheaton Precious Metals Corp. (TSE:WPM) given its attractive financial outlook?

With its shares down 14% in the past three months, it’s easy to ignore Wheaton Precious Metals (TSE:WPM). However, share prices are typically driven by a company’s long-term financial performance, which in this case looks quite promising. In particular, we will be attentive to Wheaton Precious Metals ROA today.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management uses the company’s capital. Put another way, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis of Wheaton Precious Metals

How is return on capital calculated?

Return on equity can be calculated using the formula:

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

So, based on the above formula, Wheaton Precious Metals’ ROE is:

11% = US$733m ÷ US$6.4b (Based on the last twelve months to June 2022).

The ‘yield’ is the income the business earned during the last year. So this means that for every CA$1 of its shareholders’ investments, the company generates a profit of CA$0.11.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an efficient profit-generating indicator for a company’s future earnings. Depending on how much of these earnings the company reinvests or “retains,” and how effectively it does so, we can assess a company’s earnings growth potential. Generally speaking, all other things being equal, companies with a high return on capital and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Wheaton Precious Metals earnings growth and 11% ROE

At first glance, Wheaton Precious Metals appears to have a decent ROE. Even when compared to the industry average of 12%, the company’s ROE looks pretty decent. This certainly adds some context to Wheaton Precious Metals’ exceptional 35% net income growth seen over the past five years. However, there could also be other factors behind this growth. For example, the company’s management may have made good strategic decisions or the company may have a low pay rate.

As a next step, we compared Wheaton Precious Metals’ net income growth to the industry and fortunately found that the growth seen by the company is higher than the industry average growth of 29%.

past earnings growth
TSX: WPM Past Earnings Growth Sep 21, 2022

Earnings growth is a very important factor in stock valuation. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already built into the stock price. By doing so, they will have an idea of ​​whether the stock is heading towards clear blue waters or if marshy waters await. How much is WPM worth today? the intrinsic value infographic in our free research report helps to visualize if WPM is currently mispriced in the market.

Is Wheaton Precious Metals Efficiently Reinvesting its Earnings?

Wheaton Precious Metals has a three-year average payout ratio of 37% (where you keep 63% of your income) which is not too low and not too high. The dividend appears to be well covered and Wheaton Precious Metals is efficiently reinvesting its earnings, as evidenced by its exceptional growth that we discussed earlier.

Furthermore, Wheaton Precious Metals is determined to continue to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Studying the most recent analyst consensus data, we find that the company’s future payout ratio is expected to rise to 59% over the next three years. Therefore, the expected increase in the payout ratio explains why the company’s ROE is expected to decline to 7.3% over the same period.

conclusion

Overall, we are very pleased with the performance of Wheaton Precious Metals. In particular, we like that the company is reinvesting heavily in its business and with a high rate of return. Unsurprisingly, this has led to impressive earnings growth. That said, looking at the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. To learn more about the company’s future earnings growth forecasts, take a look at this free report on the company’s analyst forecasts for more information.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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