Yahoo Finance Fenix Resources Limited (ASX:FEX) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?
Fenix Resources (ASX:FEX) has had a rough three months with its share price down 7.7%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Fenix Resources' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Fenix Resources
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 Fenix Resources is:
26% = AU$40m ÷ AU$153m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.26.
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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Fenix Resources' Earnings Growth And 26% ROE
First thing first, we like that Fenix Resources has an impressive ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. Under the circumstances, Fenix Resources' considerable five year net income growth of 47% was to be expected.
As a next step, we compared Fenix Resources' 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 21%.
Earnings growth is an important metric to consider when valuing a stock. 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. Is Fenix Resources fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Fenix Resources Efficiently Re-investing Its Profits?
Fenix Resources has a three-year median payout ratio of 44% (where it is retaining 56% of its income) which is not too low or not too high. So it seems that Fenix Resources is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Besides, Fenix Resources has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.
Summary
In total, we are pretty happy with Fenix Resources' 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 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.
