Are Robust Financials Driving The Recent Rally In Fonterra Co-operative Group Limited's (NZSE:FCG) Stock?

Fonterra Co-operative Group's (NZSE:FCG) stock is up by a considerable 29% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Fonterra Co-operative Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Fonterra Co-operative Group is:

12% = NZ$1.0b ÷ NZ$8.3b (Based on the trailing twelve months to July 2025).

The 'return' refers to a company's earnings over the last year. So, this means that for every NZ$1 of its shareholder's investments, the company generates a profit of NZ$0.12.

See our latest analysis for Fonterra Co-operative Group

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Fonterra Co-operative Group's Earnings Growth And 12% ROE

At first glance, Fonterra Co-operative Group seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. This probably laid the ground for Fonterra Co-operative Group's moderate 17% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Fonterra Co-operative Group's growth is quite high when compared to the industry average growth of 0.6% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Fonterra Co-operative Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Fonterra Co-operative Group Efficiently Re-investing Its Profits?

Fonterra Co-operative Group has a significant three-year median payout ratio of 60%, meaning that it is left with only 40% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, Fonterra Co-operative Group 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.

Summary

Overall, we are quite pleased with Fonterra Co-operative Group's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Fonterra Co-operative Group's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.