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Are Robust Financials Driving The Recent Rally In Sociedad Química y Minera de Chile S.A.'s (NYSE:SQM) Stock?

Most readers would already be aware that Sociedad Química y Minera de Chile's (NYSE:SQM) stock increased significantly by 13% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Sociedad Química y Minera de Chile's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Sociedad Química y Minera de Chile

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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So, based on the above formula, the ROE for Sociedad Química y Minera de Chile is:

79% = US$3.9b ÷ US$4.9b (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.79 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. 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.

A Side By Side comparison of Sociedad Química y Minera de Chile's Earnings Growth And 79% ROE

To begin with, Sociedad Química y Minera de Chile has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. As a result, Sociedad Química y Minera de Chile's exceptional 52% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Sociedad Química y Minera de Chile's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 13% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 SQM fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Sociedad Química y Minera de Chile Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 65% (implying that it keeps only 35% of profits) for Sociedad Química y Minera de Chile suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Sociedad Química y Minera de Chile has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 78%. Regardless, Sociedad Química y Minera de Chile's ROE is speculated to decline to 43% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Sociedad Química y Minera de Chile's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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