Anglo American Platinum (JSE: AMS) stock has risen a significant 9.4% over the past week. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In this article, we have decided to focus on the ROE of Anglo American Platinum.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Anglo American Platinum
How do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Anglo American Platinum is:
61% = R70b Ã· R115b (Based on the last twelve months up to June 2021).
The “return” is the annual profit. One way to conceptualize this is that for every ZAR1 of share capital it has, the company has made a profit of ZAR 0.61.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess the profits that the business is reinvesting or âwithholdingâ for future growth, which then gives us an idea of ââthe growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Anglo American Platinum profit growth and 61% ROE
First, we recognize that Anglo American Platinum has a significantly high ROE. Secondly, a comparison with the industry’s reported average ROE of 31% doesn’t go unnoticed for us either. As a result, Anglo American Platinum’s exceptional 73% net profit growth seen over the past five years is no surprise.
Then, comparing with the growth in net income of the industry, we found that the growth of Anglo American Platinum is quite high compared to the industry average growth of 33% during the same period, this which is great to see.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Is Anglo American Platinum fair compared to other companies? These 3 evaluation measures could help you decide.
Is Anglo American Platinum Efficiently Using Its Retained Earnings?
Anglo American Platinum’s three-year median payout ratio is fairly moderate 40%, which means the company keeps 60% of its revenue. At first glance, the dividend is well hedged and Anglo American Platinum is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
In addition, Anglo American Platinum has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to reach 62% over the next three years. Consequently, the higher expected payout rate explains the drop in the company’s expected ROE (to 44%) over the same period.
Overall, we think Anglo American Platinum’s performance has been quite good. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, looking at the latest analysts’ forecast, we found that while the company has seen past earnings growth, analysts expect future earnings to decline. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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