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Is West Fraser Timber Co. Ltd.'s(TSE:WFG) Recent Stock Performance Tethered To Its Strong Fundamentals?

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  • WFG

West Fraser Timber (TSE:WFG) has had a great run on the share market with its stock up by a significant 17% over the last three months. 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 West Fraser Timber'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 West Fraser Timber

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for West Fraser Timber is:

39% = US$2.9b ÷ US$7.4b (Based on the trailing twelve months to September 2021).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.39 in profit.

What Has ROE Got To Do With 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.

West Fraser Timber's Earnings Growth And 39% ROE

Firstly, we acknowledge that West Fraser Timber has a significantly high ROE. Secondly, even when compared to the industry average of 24% the company's ROE is quite impressive. So, the substantial 41% net income growth seen by West Fraser Timber over the past five years isn't overly surprising.

We then compared West Fraser Timber'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 9.0% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. 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 WFG fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is West Fraser Timber Making Efficient Use Of Its Profits?

West Fraser Timber's ' three-year median payout ratio is on the lower side at 3.8% implying that it is retaining a higher percentage (96%) of its profits. So it looks like West Fraser Timber is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, West Fraser Timber 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 9.5% over the next three years.

Conclusion

In total, we are pretty happy with West Fraser Timber'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. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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. 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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