Are Hudbay Minerals Inc.'s (TSE:HBM) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 11% over the past week, it is easy to disregard Hudbay Minerals (TSE:HBM). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Hudbay Minerals' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Hudbay Minerals

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 Hudbay Minerals is:

3.7% = US$83m ÷ US$2.2b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.04 in profit.

Why Is ROE Important For 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 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.

Hudbay Minerals' Earnings Growth And 3.7% ROE

It is quite clear that Hudbay Minerals' ROE is rather low. Even compared to the average industry ROE of 9.2%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Hudbay Minerals grew its net income at a significant rate of 44% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Hudbay Minerals' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 29% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. Is HBM fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Hudbay Minerals Efficiently Re-investing Its Profits?

Hudbay Minerals has a really low LTM (or last twelve month) payout ratio of 6.1%, meaning that it has the remaining 94% left over to reinvest into its business. So it looks like Hudbay Minerals is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Hudbay Minerals has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 1.4% over the next three years.

Conclusion

On the whole, we do feel that Hudbay Minerals has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.

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