Yahoo Finance Is Stelco Holdings Inc.'s (TSE:STLC) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Stelco Holdings' (TSE:STLC) stock is up by a considerable 39% over the past three months. 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. Particularly, we will be paying attention to Stelco Holdings' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Stelco Holdings
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Stelco Holdings is:
13% = CA$197m ÷ CA$1.5b (Based on the trailing twelve months to September 2023).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.13 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. 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 Stelco Holdings' Earnings Growth And 13% ROE
At first glance, Stelco Holdings seems to have a decent ROE. Especially when compared to the industry average of 8.1% the company's ROE looks pretty impressive. This probably laid the ground for Stelco Holdings' moderate 19% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Stelco Holdings' reported growth was lower than the industry growth of 28% over the last few years, which is not something we like to see.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Stelco Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Stelco Holdings Efficiently Re-investing Its Profits?
In Stelco Holdings' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 4.3% (or a retention ratio of 96%), which suggests that the company is investing most of its profits to grow its business.
Besides, Stelco Holdings has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 36% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
Summary
In total, we are pretty happy with Stelco Holdings' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
