Yahoo Finance Is Warrior Met Coal, Inc.'s (NYSE:HCC) Latest Stock Performance A Reflection Of Its Financial Health?
Warrior Met Coal (NYSE:HCC) has had a great run on the share market with its stock up by a significant 41% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Warrior Met Coal's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Warrior Met Coal
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 Warrior Met Coal is:
27% = US$213m ÷ US$785m (Based on the trailing twelve months to March 2020).
The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.27 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Warrior Met Coal's Earnings Growth And 27% ROE
First thing first, we like that Warrior Met Coal has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. Under the circumstances, Warrior Met Coal's considerable five year net income growth of 47% was to be expected.
As a next step, we compared Warrior Met Coal's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 33%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Warrior Met Coal fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Warrior Met Coal Using Its Retained Earnings Effectively?
Warrior Met Coal's ' three-year median payout ratio is on the lower side at 1.7% implying that it is retaining a higher percentage (98%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Moreover, Warrior Met Coal is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 8.5% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 16% over the same period.
Conclusion
Overall, we are quite pleased with Warrior Met Coal'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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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