With An ROE Of 44.79%, Has KAZ Minerals PLC's (LON:KAZ) Management Done Well?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between KAZ Minerals PLC (LON:KAZ)’s return fundamentals and stock market performance.

With an ROE of 44.79%, KAZ Minerals PLC (LON:KAZ) outpaced its own industry which delivered a less exciting 10.94% over the past year. However, whether this above-industry ROE is actually impressive depends on if it can be maintained. Sustainability can be gauged by a company’s financial leverage – the more debt it has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden. Let me show you what I mean by this. View out our latest analysis for KAZ Minerals

What you must know about ROE

Return on Equity (ROE) weighs KAZ Minerals’s profit against the level of its shareholders’ equity. For example, if the company invests £1 in the form of equity, it will generate £0.45 in earnings from this. Investors seeking to maximise their return in the Copper industry may want to choose the highest returning stock. However, this can be deceiving as each company has varying costs of equity and debt levels, which could exaggeratedly push up ROE at the same time as accumulating high interest expense.

ROE is measured against cost of equity in order to determine the efficiency of KAZ Minerals’s equity capital deployed. Its cost of equity is 14.15%. Given a positive discrepancy of 30.64% between return and cost, this indicates that KAZ Minerals pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue KAZ Minerals can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. ROE can be inflated by disproportionately high levels of debt. This is also unsustainable due to the high interest cost that the company will also incur. Thus, we should look at KAZ Minerals’s debt-to-equity ratio to examine sustainability of its returns. Currently the ratio stands at more than 2.5 times, which is very high. This means KAZ Minerals’s above-average ROE is being driven by its significant debt levels and its ability to grow profit hinges on a significant debt burden.

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. KAZ Minerals’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high debt level means its strong ROE may be driven by debt funding which raises concerns over the sustainability of KAZ Minerals’s returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For KAZ Minerals, there are three relevant factors you should further research:

1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is KAZ Minerals worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether KAZ Minerals is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of KAZ Minerals? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.