Yahoo Finance Is Base Resources Limited's (ASX:BSE) Recent Price Movement Underpinned By Its Weak Fundamentals?
It is hard to get excited after looking at Base Resources' (ASX:BSE) recent performance, when its stock has declined 4.5% over the past week. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Base 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Base Resources
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 Base Resources is:
12% = US$37m ÷ US$304m (Based on the trailing twelve months to December 2021).
The 'return' is the yearly profit. That means that for every A$1 worth of shareholders' equity, the company generated A$0.12 in profit.
What Has ROE Got To Do With 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Base Resources' Earnings Growth And 12% ROE
To start with, Base Resources' ROE looks acceptable. Even so, when compared with the average industry ROE of 16%, we aren't very excited. However, the moderate 9.0% net income growth seen by Base Resources over the past five years is definitely a positive. So, there might be other aspects that are positively influencing earnings growth. Such as - high earnings retention or an efficient management in place. 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 also does lend some color to the fairly high earnings growth seen by the company.
As a next step, we compared Base Resources' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 25% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Base Resources fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Base Resources Efficiently Re-investing Its Profits?
Base Resources has a very high three-year median payout ratio of 230% suggesting that the company's shareholders are getting paid from more than just the company's earnings. Still the company's earnings have grown respectably. That being said, the high payout ratio could be worth keeping an eye on in case the company is unable to keep up its current growth momentum. To know the 3 risks we have identified for Base Resources visit our risks dashboard for free.
While Base Resources has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.
Conclusion
On the whole, we feel that the performance shown by Base Resources can be open to many interpretations. Although the company has grown its earnings moderately as a result of its respectable ROE, yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth prospects. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings 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.
