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Is Caledonia Mining Corporation Plc’s (TSE:CAL) ROE Of 17.77% Sustainable?

With an ROE of 17.77%, Caledonia Mining Corporation Plc (TSX:CAL) outpaced its own industry which delivered a less exciting 11.63% over the past year. While the impressive ratio tells us that CAL has made significant profits from little equity capital, ROE doesn’t tell us if CAL has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether CAL’s ROE is actually sustainable. See our latest analysis for Caledonia Mining

Breaking down ROE — the mother of all ratios

Return on Equity (ROE) weighs Caledonia Mining’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.

Return on Equity = Net Profit ÷ Shareholders Equity

Returns are usually compared to costs to measure the efficiency of capital. Caledonia Mining’s cost of equity is 7.82%. Given a positive discrepancy of 9.95% between return and cost, this indicates that Caledonia Mining pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

TSX:CAL Last Perf May 25th 18
TSX:CAL Last Perf May 25th 18

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from Caledonia Mining’s asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt Caledonia Mining currently has. The debt-to-equity ratio currently stands at a low 3.76%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.

TSX:CAL Historical Debt May 25th 18
TSX:CAL Historical Debt May 25th 18

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Caledonia Mining exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For Caledonia Mining, I’ve put together three essential factors you should look at:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Valuation: What is Caledonia Mining worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Caledonia Mining is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Caledonia Mining? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.