Stock Analysis

Antofagasta plc's (LON:ANTO) Stock Is Going Strong: Have Financials A Role To Play?

LSE:ANTO
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Most readers would already be aware that Antofagasta's (LON:ANTO) stock increased significantly by 52% 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. Particularly, we will be paying attention to Antofagasta's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Antofagasta

How To 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 Antofagasta is:

6.1% = US$598m ÷ US$9.8b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.06 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 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.

Antofagasta's Earnings Growth And 6.1% ROE

On the face of it, Antofagasta's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 18%. However, we we're pleasantly surprised to see that Antofagasta grew its net income at a significant rate of 31% in the last five years. Therefore, there could be other reasons behind this growth. 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.

As a next step, we compared Antofagasta'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 23%.

past-earnings-growth
LSE:ANTO Past Earnings Growth January 11th 2021

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is ANTO worth today? The intrinsic value infographic in our free research report helps visualize whether ANTO is currently mispriced by the market.

Is Antofagasta Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 70% (implying that it keeps only 30% of profits) for Antofagasta suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Antofagasta is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 47% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Summary

On the whole, we do feel that Antofagasta has some positive attributes. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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. 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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