Fenix Resources Limited's (ASX:FEX) Stock Is Going Strong: Is the Market Following Fundamentals?

Fenix Resources (ASX:FEX) has had a great run on the share market with its stock up by a significant 43% 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. In this article, we decided to focus on Fenix Resources' ROE.

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.

Check out our latest analysis for Fenix Resources

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 Fenix Resources is:

26% = AU$40m ÷ AU$153m (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.26 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Fenix Resources' Earnings Growth And 26% ROE

First thing first, we like that Fenix Resources has an impressive ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. So, the substantial 47% net income growth seen by Fenix Resources over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Fenix Resources' growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Fenix Resources''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Fenix Resources Using Its Retained Earnings Effectively?

The three-year median payout ratio for Fenix Resources is 44%, which is moderately low. The company is retaining the remaining 56%. By the looks of it, the dividend is well covered and Fenix Resources is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Fenix Resources is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Conclusion

In total, we are pretty happy with Fenix Resources' performance. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com