Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for First Quantum Minerals is:
13% = US$1.6b ÷ US$12b (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 CA$1 worth of shareholders’ equity, the company generated CA$0.13 in profit.
What Has ROE Got To Do With 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 13% ROE
To start with, First Quantum Minerals’ ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. Consequently, this likely laid the ground for the impressive net income growth of 49% seen over the past five years by First Quantum Minerals. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
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 29% in the same period, which is great 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. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about First Quantum Minerals”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is First Quantum Minerals Making Efficient Use Of Its Profits?
First Quantum Minerals’ three-year median payout ratio to shareholders is 0.7%, which is quite low. This implies that the company is retaining 99% of its profits. So it looks like First Quantum Minerals is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Besides, First Quantum Minerals has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 13% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.
Overall, we are quite pleased with First Quantum Minerals’ performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.