Commercial Metals Company's (NYSE:CMC) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 7.4% over the past three months, it is easy to disregard Commercial Metals (NYSE:CMC). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Commercial Metals' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Commercial Metals

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 Commercial Metals is:

13% = US$566m ÷ US$4.3b (Based on the trailing twelve months to May 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.13 in profit.

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Commercial Metals' Earnings Growth And 13% ROE

To begin with, Commercial Metals seems to have a respectable ROE. Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. This certainly adds some context to Commercial Metals' exceptional 28% net income growth seen over the past five years. However, there could also be other causes 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.

Next, on comparing with the industry net income growth, we found that Commercial Metals' growth is quite high when compared to the industry average growth of 23% 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 CMC fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Commercial Metals Using Its Retained Earnings Effectively?

Commercial Metals' three-year median payout ratio to shareholders is 8.7%, which is quite low. This implies that the company is retaining 91% of its profits. So it looks like Commercial Metals is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Commercial Metals has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 17% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 10% over the same period.

Summary

In total, we are pretty happy with Commercial Metals' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.