Can Fenix Resources Limited's (ASX:FEX) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Fenix Resources (ASX:FEX) has had a great run on the share market with its stock up by a significant 38% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Specifically, we decided to study Fenix Resources' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Fenix Resources is:

3.0% = AU$5.4m ÷ AU$178m (Based on the trailing twelve months to June 2025).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.03 in profit.

See our latest analysis for Fenix Resources

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Fenix Resources' Earnings Growth And 3.0% ROE

As you can see, Fenix Resources' ROE looks pretty weak. Even compared to the average industry ROE of 9.3%, the company's ROE is quite dismal. Therefore, Fenix Resources' flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Fenix Resources' net income growth with the industry and found that the average industry growth rate was 11% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Fenix Resources fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Fenix Resources Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 51% (meaning, the company retains only 49% of profits) for Fenix Resources suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Fenix Resources has been paying dividends over a period of four years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 5.6% over the next three years. The fact that the company's ROE is expected to rise to 13% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we would be extremely cautious before making any decision on Fenix Resources. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.