Do Its Financials Have Any Role To Play In Driving Sociedad Química y Minera de Chile S.A.'s (NYSE:SQM) Stock Up Recently?

Sociedad Química y Minera de Chile (NYSE:SQM) has had a great run on the share market with its stock up by a significant 10% over the last week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Sociedad Química y Minera de Chile's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Sociedad Química y Minera de Chile

How Do You Calculate Return On Equity?

ROE 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 Sociedad Química y Minera de Chile is:

0.7% = US$34m ÷ US$5.0b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.01.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Sociedad Química y Minera de Chile's Earnings Growth And 0.7% ROE

It is quite clear that Sociedad Química y Minera de Chile's ROE is rather low. Even compared to the average industry ROE of 9.6%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Sociedad Química y Minera de Chile grew its net income at a significant rate of 40% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Sociedad Química y Minera de Chile's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. 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 Sociedad Química y Minera de Chile is trading on a high P/E or a low P/E, relative to its industry.

Is Sociedad Química y Minera de Chile Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 66% (implying that it keeps only 34% of profits) for Sociedad Química y Minera de Chile suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Sociedad Química y Minera de Chile has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 62%. Regardless, the future ROE for Sociedad Química y Minera de Chile is predicted to rise to 35% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that Sociedad Química y Minera de Chile has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.