Yahoo Finance Is Grange Resources Limited's (ASX:GRR) Latest Stock Performance A Reflection Of Its Financial Health?
Grange Resources (ASX:GRR) has had a great run on the share market with its stock up by a significant 65% over the last three months. 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 Grange Resources' 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.
Check out our latest analysis for Grange Resources
How Do You 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 Grange Resources is:
21% = AU$122m ÷ AU$586m (Based on the trailing twelve months to June 2020).
The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.21 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Grange Resources' Earnings Growth And 21% ROE
At first glance, Grange Resources seems to have a decent ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. This certainly adds some context to Grange Resources' exceptional 54% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Grange 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 32%.
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 Grange Resources fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Grange Resources Efficiently Re-investing Its Profits?
Grange Resources' three-year median payout ratio to shareholders is 20%, which is quite low. This implies that the company is retaining 80% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Besides, Grange Resources has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.
Summary
In total, we are pretty happy with Grange Resources' 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 2 risks we have identified for Grange Resources by visiting our risks dashboard for free on our platform here.
This article by Simply Wall St is general in nature. 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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