Most readers would already know that Lundin Mining’s (TSE:LUN) stock increased by 4.8% over the past week. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Lundin Mining’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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Lundin Mining
How Is ROE Calculated?
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 Lundin Mining is:
3.3% = US$208m ÷ US$6.4b (Based on the trailing twelve months to March 2024).
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$0.03 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. 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.
Lundin Mining’s Earnings Growth And 3.3% ROE
As you can see, Lundin Mining’s ROE looks pretty weak. Not just that, even compared to the industry average of 9.0%, the company’s ROE is entirely unremarkable. Lundin Mining was still able to see a decent net income growth of 18% over the past five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Lundin Mining’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 29% in the same 5-year period, which is a bit concerning.
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). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Lundin Mining is trading on a high P/E or a low P/E, relative to its industry.
Is Lundin Mining Using Its Retained Earnings Effectively?
Lundin Mining has a three-year median payout ratio of 40%, which implies that it retains the remaining 60% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Moreover, Lundin Mining is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 31% over the next three years. As a result, the expected drop in Lundin Mining’s payout ratio explains the anticipated rise in the company’s future ROE to 12%, over the same period.
Conclusion
In total, it does look like Lundin Mining has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. 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 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.
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