Yahoo Finance Schnitzer Steel Industries, Inc.'s (NASDAQ:SCHN) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
With its stock down 12% over the past month, it is easy to disregard Schnitzer Steel Industries (NASDAQ:SCHN). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Schnitzer Steel Industries' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Schnitzer Steel Industries
How Is ROE Calculated?
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 Schnitzer Steel Industries is:
18% = US$172m ÷ US$958m (Based on the trailing twelve months to August 2022).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.18.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Schnitzer Steel Industries' Earnings Growth And 18% ROE
At first glance, Schnitzer Steel Industries seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 20%. This certainly adds some context to Schnitzer Steel Industries' moderate 16% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Schnitzer Steel Industries' reported growth was lower than the industry growth of 34% in the same period, which is not something we like to see.
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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Schnitzer Steel Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Schnitzer Steel Industries Making Efficient Use Of Its Profits?
Schnitzer Steel Industries has a low three-year median payout ratio of 17%, meaning that the company retains the remaining 83% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Besides, Schnitzer Steel Industries has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 16% of its profits over the next three years. Regardless, Schnitzer Steel Industries' ROE is speculated to decline to 6.2% despite there being no anticipated change in its payout ratio.
Conclusion
On the whole, we feel that Schnitzer Steel Industries' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 1 risk we have identified for Schnitzer Steel Industries visit our risks dashboard for free.
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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