Mako Mining's (CVE:MKO) stock is up by a considerable 6.6% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Mako Mining's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Mako Mining

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 Mako Mining is:

63% = US$22m ÷ US$35m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.63.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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 Mako Mining's Earnings Growth And 63% ROE

First thing first, we like that Mako Mining has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 9.3% also doesn't go unnoticed by us. So, the substantial 55% net income growth seen by Mako Mining over the past five years isn't overly surprising.

As a next step, we compared Mako Mining's 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 26%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Mako Mining's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mako Mining Efficiently Re-investing Its Profits?

Mako Mining doesn't pay any regular dividends to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.