Yahoo Finance Zimplats Holdings Limited's (ASX:ZIM) Stock Is Going Strong: Is the Market Following Fundamentals?
Zimplats Holdings' (ASX:ZIM) stock is up by a considerable 17% over the past 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. In this article, we decided to focus on Zimplats Holdings' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Zimplats Holdings
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Zimplats Holdings is:
32% = US$563m ÷ US$1.7b (Based on the trailing twelve months to June 2021).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.32 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
Zimplats Holdings' Earnings Growth And 32% ROE
Firstly, we acknowledge that Zimplats Holdings has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. Under the circumstances, Zimplats Holdings' considerable five year net income growth of 63% was to be expected.
Next, on comparing with the industry net income growth, we found that Zimplats Holdings' growth is quite high when compared to the industry average growth of 24% in the same period, which is great to see.
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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zimplats Holdings is trading on a high P/E or a low P/E, relative to its industry.
Is Zimplats Holdings Making Efficient Use Of Its Profits?
The three-year median payout ratio for Zimplats Holdings is 31%, which is moderately low. The company is retaining the remaining 69%. By the looks of it, the dividend is well covered and Zimplats Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, Zimplats Holdings has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.
Summary
On the whole, we feel that Zimplats Holdings' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Zimplats Holdings visit our risks dashboard for free.
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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