Yahoo Finance African Rainbow Minerals Limited (JSE:ARI) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?
African Rainbow Minerals' (JSE:ARI) stock is up by a considerable 48% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study African Rainbow Minerals' ROE in this article.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for African Rainbow Minerals
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 African Rainbow Minerals is:
8.1% = R4.4b ÷ R54b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every ZAR1 worth of equity, the company was able to earn ZAR0.08 in profit.
Why Is ROE Important For 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. 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.
African Rainbow Minerals' Earnings Growth And 8.1% ROE
As you can see, African Rainbow Minerals' ROE looks pretty weak. Even compared to the average industry ROE of 13%, the company's ROE is quite dismal. African Rainbow Minerals was still able to see a decent net income growth of 18% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.
We then compared African Rainbow Minerals' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 27% in the same 5-year period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 African Rainbow Minerals is trading on a high P/E or a low P/E, relative to its industry.
Is African Rainbow Minerals Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 52% (or a retention ratio of 48%) for African Rainbow Minerals suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, African Rainbow 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 56%. Still, forecasts suggest that African Rainbow Minerals' future ROE will rise to 14% even though the the company's payout ratio is not expected to change by much.
Summary
On the whole, we feel that the performance shown by African Rainbow Minerals can be open to many interpretations. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
