SilverCrest Metals (TSE:SIL) has had a rough month with its share price down 9.7%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to SilverCrest Metals' ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for SilverCrest Metals

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for SilverCrest Metals is:

23% = US$106m ÷ US$453m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.23 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of SilverCrest Metals' Earnings Growth And 23% ROE

First thing first, we like that SilverCrest Metals has an impressive ROE. Secondly, even when compared to the industry average of 9.3% the company's ROE is quite impressive. Under the circumstances, SilverCrest Metals' considerable five year net income growth of 68% was to be expected.

As a next step, we compared SilverCrest Metals' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 23%.

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if SilverCrest Metals is trading on a high P/E or a low P/E, relative to its industry.