Yahoo Finance Is Warrior Met Coal, Inc.'s (NYSE:HCC) Recent Stock Performance Tethered To Its Strong Fundamentals?
Warrior Met Coal's (NYSE:HCC) stock is up by a considerable 13% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Warrior Met Coal's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Warrior Met Coal
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Warrior Met Coal is:
21% = US$422m ÷ US$2.0b (Based on the trailing twelve months to June 2024).
The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.21.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Warrior Met Coal's Earnings Growth And 21% ROE
At first glance, Warrior Met Coal seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.8%. Probably as a result of this, Warrior Met Coal was able to see a decent growth of 16% over the last five years.
As a next step, we compared Warrior Met Coal's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 24% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Warrior Met Coal's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Warrior Met Coal Using Its Retained Earnings Effectively?
In Warrior Met Coal's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 2.9% (or a retention ratio of 97%), which suggests that the company is investing most of its profits to grow its business.
Moreover, Warrior Met Coal is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 4.3% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 16%, over the same period.
Summary
On the whole, we feel that Warrior Met Coal's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. 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.
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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.
