Yahoo Finance Nucor Corporation's (NYSE:NUE) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
Nucor (NYSE:NUE) has had a great run on the share market with its stock up by a significant 16% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Nucor's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Nucor
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Nucor is:
22% = US$4.9b ÷ US$22b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.22 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.
Nucor's Earnings Growth And 22% ROE
To begin with, Nucor seems to have a respectable ROE. On comparing with the average industry ROE of 10.0% the company's ROE looks pretty remarkable. Probably as a result of this, Nucor was able to see an impressive net income growth of 33% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Nucor's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 23%.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Nucor fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Nucor Making Efficient Use Of Its Profits?
Nucor has a really low three-year median payout ratio of 9.3%, meaning that it has the remaining 91% left over to reinvest into its business. So it looks like Nucor is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, Nucor has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 15% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 12%, over the same period.
Conclusion
Overall, we are quite pleased with Nucor's performance. 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, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
