UK markets open in 4 hours 30 minutes
  • NIKKEI 225

    28,281.04
    +312.05 (+1.12%)
     
  • HANG SENG

    18,824.84
    +227.61 (+1.22%)
     
  • CRUDE OIL

    80.37
    -0.18 (-0.22%)
     
  • GOLD FUTURES

    1,788.60
    +28.70 (+1.63%)
     
  • DOW

    34,589.77
    +737.24 (+2.18%)
     
  • BTC-GBP

    14,196.09
    +108.48 (+0.77%)
     
  • CMC Crypto 200

    406.80
    +6.11 (+1.52%)
     
  • ^IXIC

    11,468.00
    +484.22 (+4.41%)
     
  • ^FTAS

    4,139.65
    +27.35 (+0.67%)
     

Declining Stock and Solid Fundamentals: Is The Market Wrong About Anglo American plc (LON:AAL)?

With its stock down 23% over the past three months, it is easy to disregard Anglo American (LON:AAL). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Anglo American's ROE today.

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.

Check out our latest analysis for Anglo American

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Anglo American is:

34% = US$12b ÷ US$35b (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.34.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Anglo American's Earnings Growth And 34% ROE

To begin with, Anglo American has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 14% also doesn't go unnoticed by us. This likely paved the way for the modest 18% net income growth seen by Anglo American over the past five years. growth

As a next step, we compared Anglo American's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 18% in the same period.

past-earnings-growth
past-earnings-growth

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). Doing so will help them establish if the stock's future looks promising or ominous. Is AAL fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Anglo American Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 42% (implying that the company retains 58% of its profits), it seems that Anglo American is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Anglo American 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 45% of its profits over the next three years. Regardless, Anglo American's ROE is speculated to decline to 15% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Anglo American's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here