Do Its Financials Have Any Role To Play In Driving Sociedad Punta del Cobre S.A.'s (SNSE:PUCOBRE) Stock Up Recently?

Sociedad Punta del Cobre's (SNSE:PUCOBRE) stock is up by a considerable 36% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Sociedad Punta del Cobre's 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Sociedad Punta del Cobre

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 Sociedad Punta del Cobre is:

12% = US$51m ÷ US$423m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CLP1 of shareholders' capital it has, the company made CLP0.12 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Sociedad Punta del Cobre's Earnings Growth And 12% ROE

At first glance, Sociedad Punta del Cobre's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 12%, we may spare it some thought. Having said that, Sociedad Punta del Cobre has shown a modest net income growth of 14% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Sociedad Punta del Cobre'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 5.2%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Sociedad Punta del Cobre's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sociedad Punta del Cobre Efficiently Re-investing Its Profits?

While Sociedad Punta del Cobre has a three-year median payout ratio of 50% (which means it retains 50% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Along with seeing a growth in earnings, Sociedad Punta del Cobre only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

In total, it does look like Sociedad Punta del Cobre has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Sociedad Punta del Cobre's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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.
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