What These Ratios Tell Us About Randgold Resources Limited

Shares in Randgold Resources Limited (LON:RRS) look fully valued, argues Roland Head.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Before I decide whether to buy a company’s shares, I always like to look at two core financial ratios — return on equity and net gearing.

These two ratios provide an indication of how successful a company is at generating profits using shareholders’ funds and debt, and they have a strong influence on dividend payments and share price growth.

Today, I’m going to take a look at FTSE 100 gold miner Randgold Resources (LSE: RRS) (NASDAQ: GOLD.US), to see how attractive it looks on these two measures.

Return on equity

The return a company generates on its shareholders’ funds is known as return on equity, or ROE. Return on equity can be calculated by dividing a company’s annual profit by its equity (ie, the difference between its total assets and its total liabilities) and is expressed as a percentage.

Randgold’s share price has doubled over the last five years, and its dividend has quadrupled, as the company has ramped up production at its African gold mines. These gains have also been reflected in Randgold’s ROE, as we can see:

Randgold Resources 2008 2009 2010 2011 2012 Average
ROE 6.5% 6.0% 6.0% 19.3% 18.3% 11.2%

What about debt?  

A key weakness of ROE is that it doesn’t show how much debt a company is using to boost its returns. My preferred way of measuring a company’s debt is by looking at its net gearing — the ratio of net debt to equity.

Randgold has maintained a net cash position for a number of years, so excessive debt isn’t a concern, but how does it compare to two of its largest UK-listed peers?

Company Net gearing 5-year
average ROE
African Barrick Gold -11.9% 0.9%
Randgold Resources -9.2% 11.2%
Polymetal International 39.8% 25%
(3 year avg.)

Of the three above, Randgold’s combination of growing ROE and net cash is by far the most attractive to me, especially as Randgold claims that it can remain profitable as long as gold prices stay above $1,000/ounce.

Is Randgold Resources a buy?

Randgold’s production is set to rise by up to 75% over the next few years, as its Kibali mine ramps up. However, the falling price of gold means that Randgold’s earnings are expected to drop by around a quarter this year, as the lower gold price filters through to its bottom line.

This means that Randgold’s trailing P/E of 17 equates to a forward P/E of around 23 — which I find slightly ambitious. Although I have no doubt that Randgold will continue to deliver a solid ROE, I think that its shares are fully valued at present, and rate them as a hold.

Finding market-beating returns

Finding shares that can beat the market over a long period is hard, but if you already hold Randgold shares, then you might be interested in learning about five star shares that have been identified by the Fool’s team of analysts as 5 Shares To Retire On.

I own three of the shares featured in this free report, and I don’t mind admitting they are amongst the most successful investments I’ve ever made.

To find out the identity of these five companies, click here to download your copy of this report now, while it’s still available.

> Roland does not own shares in any of the companies mentioned in this article.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

4 penny stocks I’d love to buy for my Xmas stocking!

I'm hoping to buy these top penny stocks when I next have the opportunity. I think they could be some…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Why I believe the lagging FTSE 250 is a rare opportunity to buy cheap shares now

The FTSE 250 is showing some attractive numbers and they suggest some cracking value among businesses listed in the index.

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is this FTSE 250 TV giant one of the best opportunities on the market right now?

A staple name among UK television lovers, this FTSE 250 stock has fallen substantially. Is it time to buy the…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Could this 2.5% yielding penny stock soar in 2024 and beyond?

This penny stock has struggled throughout 2023 but could the new year provide it with a much needed positive momentum…

Read more »

Number three written on white chat bubble on blue background
Investing Articles

Just released: the 3 best growth-focused stocks to buy in December [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Close-up of British bank notes
Investing Articles

With £500 I’d start a passive income portfolio with these UK shares

Owning shares in an established business can be a great source of passive income. And Stephen Wright thinks now is…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

I’d buy these FTSE 100 and small cap stocks in 2024 to target a second income!

This FTSE share offers a 6% dividend yield and trades on a rock-bottom P/E ratio. Here's why I'll buy it,…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Here’s one excellent FTSE 100 value stock investors should consider buying

Sumayya Mansoor explains why this packaging giant is currently in value stock territory and should be on investors radars.

Read more »