Declining Stock and Solid Fundamentals: Is The Market Wrong About Freeport-McMoRan Inc. (NYSE:FCX)?

With its stock down 4.2% over the past month, it is easy to disregard Freeport-McMoRan (NYSE:FCX). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Freeport-McMoRan's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Freeport-McMoRan

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 Freeport-McMoRan is:

16% = US$4.7b ÷ US$29b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.16 in profit.

What Is The Relationship Between ROE And 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. 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.

Freeport-McMoRan's Earnings Growth And 16% ROE

To start with, Freeport-McMoRan's ROE looks acceptable. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. Probably as a result of this, Freeport-McMoRan was able to see an impressive net income growth of 23% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Freeport-McMoRan's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Freeport-McMoRan is trading on a high P/E or a low P/E, relative to its industry.

Is Freeport-McMoRan Using Its Retained Earnings Effectively?

Freeport-McMoRan has a three-year median payout ratio of 33% (where it is retaining 67% of its income) which is not too low or not too high. So it seems that Freeport-McMoRan is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Freeport-McMoRan has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 32% of its profits over the next three years. As a result, Freeport-McMoRan's ROE is not expected to change by much either, which we inferred from the analyst estimate of 18% for future ROE.

Conclusion

On the whole, we feel that Freeport-McMoRan's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.