Yahoo Finance Is Newcrest Mining Limited's (ASX:NCM) Recent Performance Tethered To Its Attractive Financial Prospects?
Newcrest Mining's (ASX:NCM) stock is up by 8.4% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to Newcrest Mining's ROE today.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Newcrest Mining
How To Calculate Return On Equity?
Return on equity 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 Newcrest Mining is:
10% = US$965m ÷ US$9.6b (Based on the trailing twelve months to December 2020).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.10 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Newcrest Mining's Earnings Growth And 10% ROE
At first glance, Newcrest Mining seems to have a decent ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 15%. However, we are pleased to see the impressive 23% net income growth reported by Newcrest Mining over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this certainly also provides some context to the high earnings growth seen by the company.
Next, on comparing Newcrest Mining's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 28% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Newcrest Mining's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Newcrest Mining Making Efficient Use Of Its Profits?
The three-year median payout ratio for Newcrest Mining is 30%, which is moderately low. The company is retaining the remaining 70%. So it seems that Newcrest Mining is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Moreover, Newcrest Mining 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 31% of its profits over the next three years. Regardless, Newcrest Mining's ROE is speculated to decline to 7.2% despite there being no anticipated change in its payout ratio.
Conclusion
Overall, we are quite pleased with Newcrest Mining's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
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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