Is Steel Dynamics, Inc.'s (NASDAQ:STLD) Recent Stock Performance Tethered To Its Strong Fundamentals?

Steel Dynamics' (NASDAQ:STLD) stock is up by a considerable 31% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Steel Dynamics' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Steel Dynamics

How Do You 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 Steel Dynamics is:

28% = US$2.5b ÷ US$8.8b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.28.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Steel Dynamics' Earnings Growth And 28% ROE

Firstly, we acknowledge that Steel Dynamics has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 10.0% also doesn't go unnoticed by us. Under the circumstances, Steel Dynamics' considerable five year net income growth of 33% was to be expected.

Next, on comparing with the industry net income growth, we found that Steel Dynamics' growth is quite high when compared to the industry average growth of 23% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Steel Dynamics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Steel Dynamics Efficiently Re-investing Its Profits?

Steel Dynamics has a really low three-year median payout ratio of 8.9%, meaning that it has the remaining 91% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Steel Dynamics is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 15% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 15% over the same period.

Summary

On the whole, we feel that Steel Dynamics' 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 sizeable growth in its earnings. 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.

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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.