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

With its inventory down 14% over the past three months, it’s easy to ignore Wheaton Precious Metals (TSE: WPM). However, stock prices are usually driven by the company’s long-term financial performance, which in this case looks very promising. In particular, we will pay attention to the return on equity of Wheaton Precious Metals today.

Return on equity or return on equity is a key measure used to assess how efficiently a company’s management is using the company’s capital. In other words, it reveals the company’s success in converting shareholder investments into profits.

Check out our latest analysis for Wheaton Precious Metals

How do you calculate return on equity?

Return on equity can be calculated using the formula:

Return on Equity = Net Profit (from Continuing Operations) รท Shareholders’ Equity

So, based on the above formula, the ROE for Wheaton precious metals is:

11% = $733 million $6.4 billion (based on the subsequent twelve months to June 2022).

“Return” is the income the company has earned over the past year. So, this means that for every Canadian dollar of shareholder investment, the company generates a profit of CA$0.11.

What should the ROE do as earnings grow?

We have already established that ROE acts as an effective profit generation measure for a company’s future earnings. Depending on how much of these earnings the company reinvests or “keeps,” and how effective this is, we can then assess the company’s earnings growth potential. In general, other things being equal, companies with high return on equity and retained earnings have a higher growth rate than companies that do not share these traits.

Side-by-side comparison to Wheaton’s precious metals earnings growth and 11% ROE

At first glance, it appears that Wheaton Precious Metals has a decent return on equity. Even when compared to the industry average of 12%, the company’s ROE looks quite decent. This certainly adds some context to Wheaton’s exceptional net income growth of 35% over the past five years. However, there may also be other drivers behind this growth. For example, it is possible that the company’s management has made some good strategic decisions, or the company has a low payout ratio.

As a next step, we compared Wheaton Precious Metals’ net income growth with the industry, and to our delight we found the company’s growth to be above the industry average growth of 29%.

TSX: Ex-WPM earnings growth on September 21, 2022

Earnings growth is a big factor in stock valuation. What investors need to determine next is whether, or not, the expected earnings growth is actually built into the stock price. By doing this, they will have an idea if the stock is heading into clear blue water or if the swampy water is waiting. What is the value of WPM today? The intrinsic value infographic in our free research report helps visualize whether the market has currently mispriced WPM.

Is Wheaton Precious Metals Reinvesting Its Profits Efficiently?

Wheaton Precious Metals has a three-year average payout rate of 37% (it keeps 63% of its income) which is neither too low nor too high. By looks, the dividend is well covered and Wheaton Precious Metals is efficiently reinvesting its dividend as evidenced by its exceptional growth which we discussed above.

Furthermore, Wheaton Precious Metals is determined to continue to share its dividends with shareholders which we infer from its long history of paying dividends for at least ten years. When examining the latest analyst consensus data, we found that the company’s future payments ratio is expected to rise to 59% over the next three years. Therefore, the expected rise in the payout ratio explains why the company’s return on equity fell to 7.3% over the same period.

conclusion

All in all, 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 led to an impressive growth in earnings. However, when examining the latest analysts’ forecasts, we find that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To learn more about the company’s future earnings growth forecast, take a look at this Free A report on analysts’ forecasts for the company to find out more.

This article by Simply Wall St is general in nature. We provide comments based only on historical data and analyst expectations using an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock, nor does it take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials. Wall Street simply has no position in any of the stocks mentioned.

Evaluation is complex, but we help simplify it.

Find out if Wheaton Precious Metals potentially overvalued or undervalued by checking out our comprehensive analysis, which includes Fair value estimates, risks, warnings, dividends, insider transactions and financial soundness.

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