Is Weakness In Nutrien Ltd. (TSE:NTR) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 28% over the past three months, it is easy to disregard Nutrien (TSE:NTR). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Nutrien's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Nutrien

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 Nutrien is:

27% = US$6.9b ÷ US$25b (Based on the trailing twelve months to March 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.27 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Nutrien's Earnings Growth And 27% ROE

First thing first, we like that Nutrien has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 22% which is quite remarkable. As a result, Nutrien's exceptional 68% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Nutrien's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 37%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is NTR fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Nutrien Using Its Retained Earnings Effectively?

Nutrien's three-year median payout ratio is a pretty moderate 46%, meaning the company retains 54% of its income. By the looks of it, the dividend is well covered and Nutrien is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Nutrien is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 37% over the next three years. However, Nutrien's future ROE is expected to decline to 9.2% despite the expected decline in its payout ratio. We infer that there could be other factors that could be steering the foreseen decline in the company's ROE.

Conclusion

Overall, we are quite pleased with Nutrien's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.