Is Noble Iron Inc.'s (CVE:NIR) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

By
Simply Wall St
Published
May 13, 2022
TSXV:NIR
Source: Shutterstock

Noble Iron's (CVE:NIR) stock is up by a considerable 34% over the past week. 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. Specifically, we decided to study Noble Iron's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Noble Iron

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Noble Iron is:

5.2% = CA$268k ÷ CA$5.1m (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.05.

Why Is ROE Important For 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. 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.

Noble Iron's Earnings Growth And 5.2% ROE

At first glance, Noble Iron's ROE doesn't look very promising. Next, when compared to the average industry ROE of 8.1%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Noble Iron was able to grow its net income considerably, at a rate of 36% in the last five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Noble Iron's 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 16% in the same period.

past-earnings-growth
TSXV:NIR Past Earnings Growth May 13th 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Noble Iron fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Noble Iron Efficiently Re-investing Its Profits?

Noble Iron doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

On the whole, we do feel that Noble Iron 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Noble Iron by visiting our risks dashboard for free on our platform here.

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