Yahoo Finance Are Robust Financials Driving The Recent Rally In Fortescue Metals Group Limited's (ASX:FMG) Stock?
Fortescue Metals Group's (ASX:FMG) stock is up by a considerable 21% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Fortescue Metals Group's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Fortescue Metals Group
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 Fortescue Metals Group is:
36% = US$6.2b ÷ US$17b (Based on the trailing twelve months to June 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.36 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of Fortescue Metals Group's Earnings Growth And 36% ROE
Firstly, we acknowledge that Fortescue Metals Group has a significantly high ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. As a result, Fortescue Metals Group's exceptional 39% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing Fortescue Metals Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 33% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Fortescue Metals Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Fortescue Metals Group Efficiently Re-investing Its Profits?
Fortescue Metals Group's significant three-year median payout ratio of 74% (where it is retaining only 26% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.
Besides, Fortescue Metals Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 67%. Regardless, Fortescue Metals Group's ROE is speculated to decline to 15% despite there being no anticipated change in its payout ratio.
Conclusion
In total, we are pretty happy with Fortescue Metals Group's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
