With its stock down 19% over the past month, it is easy to disregard First Quantum Minerals (TSE:FM). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on First Quantum Minerals’ ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How Is ROE Calculated?
Return on equity 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 First Quantum Minerals is:
11% = US$1.3b ÷ US$12b (Based on the trailing twelve months to March 2022).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CA$1 of shareholders’ capital it has, the company made CA$0.11 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. 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.
First Quantum Minerals’ Earnings Growth And 11% ROE
To begin with, First Quantum Minerals seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This probably goes some way in explaining First Quantum Minerals’ significant 40% net income growth over the past five years amongst other factors. We reckon that there could also be other factors at play here. Such as – high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that First Quantum Minerals’ growth is quite high when compared to the industry average growth of 30% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Is First Quantum Minerals fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is First Quantum Minerals Making Efficient Use Of Its Profits?
First Quantum Minerals’ ‘ three-year median payout ratio is on the lower side at 0.7% implying that it is retaining a higher percentage (99%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Moreover, First Quantum Minerals is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 15% over the next three years. Despite the higher expected payout ratio, the company’s ROE is not expected to change by much.
On the whole, we feel that First Quantum Minerals’ performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page 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.
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