Profit ratio

Newcrest Mining Limited (ASX:NCM) stock has seen strong momentum: does this call for further study of its financial outlook?

Newcrest Mining Inc (ASX:NCM) has had a strong run in the equity market with its shares rising a significant 17% over the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In particular, we’ll be paying attention to Newcrest Mining’s ROE today.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for Newcrest Mining

How is ROE calculated?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Newcrest Mining is:

9.1% = $909 million ÷ $10.0 billion (based on trailing 12 months to December 2021).

“Yield” refers to a company’s earnings over the past year. This therefore means that for every A$1 of investment by its shareholder, the company generates a profit of A$0.09.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Newcrest Mining earnings growth and ROE of 9.1%

At first glance, Newcrest Mining’s ROE isn’t much to tell. Then, compared to the industry average ROE of 16%, the company’s ROE leaves us even less excited. Despite this, surprisingly, Newcrest Mining has experienced exceptional net profit growth of 31% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. Such as – high revenue retention or effective management in place.

We then compared Newcrest Mining’s net income growth with the industry and we are pleased to see that the company’s growth figure is higher compared to the industry which has a 25% growth rate in during the same period.

ASX: NCM Past Earnings Growth May 6, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. If you’re wondering about Newcrest Mining’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.

Does Newcrest Mining use its profits efficiently?

Newcrest Mining’s three-year median payout ratio is a rather moderate 30%, meaning the company retains 70% of its revenue. On the face of it, the dividend is well covered and Newcrest Mining is reinvesting its earnings efficiently, as evidenced by its exceptional growth discussed above.

Moreover, Newcrest Mining has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out around 36% of its earnings over the next three years. Still, forecasts suggest that Newcrest Mining’s future ROE will drop to 6.3%, even though the company’s payout ratio isn’t expected to change much.

Summary

Overall, we believe Newcrest Mining has positive attributes. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, in studying the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.