Has Northern Star Resources Limited's (ASX:NST) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Northern Star Resources (ASX:NST) has had a great run on the share market with its stock up by a significant 42% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Northern Star Resources' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Northern Star Resources

How To 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 Northern Star Resources is:

5.2% = AU$430m ÷ AU$8.2b (Based on the trailing twelve months to June 2022).

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$0.05 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Northern Star Resources' Earnings Growth And 5.2% ROE

On the face of it, Northern Star Resources' ROE is not much to talk about. Next, when compared to the average industry ROE of 15%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Northern Star Resources was able to grow its net income considerably, at a rate of 39% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Northern Star Resources' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 33% in the same period.

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). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for NST? You can find out in our latest intrinsic value infographic research report.

Is Northern Star Resources Efficiently Re-investing Its Profits?

The three-year median payout ratio for Northern Star Resources is 45%, which is moderately low. The company is retaining the remaining 55%. By the looks of it, the dividend is well covered and Northern Star Resources is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Northern Star Resources has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 51%. Regardless, the future ROE for Northern Star Resources is predicted to rise to 8.5% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that Northern Star Resources has some positive attributes. The company's strong market returns relative to peers could be a reflection of a focus on driving growth in free cash flow and EBITDA. Despite its low return on equity, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.