Warrior Met Coal's (NYSE:HCC) stock is up by a considerable 18% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Warrior Met Coal'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Warrior Met Coal is:
21% = US$422m ÷ US$2.0b (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.21 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Warrior Met Coal's Earnings Growth And 21% ROE
To begin with, Warrior Met Coal seems to have a respectable ROE. Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. This certainly adds some context to Warrior Met Coal's decent 16% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Warrior Met Coal's reported growth was lower than the industry growth of 23% over the last few years, which is not something we like 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. Is Warrior Met Coal fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Warrior Met Coal Efficiently Re-investing Its Profits?
Warrior Met Coal's three-year median payout ratio to shareholders is 2.9% (implying that it retains 97% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Besides, Warrior Met Coal has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 5.9% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 10%, over the same period.
Summary
On the whole, we feel that Warrior Met Coal's 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 a good amount of 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.
