Do Its Financials Have Any Role To Play In Driving Kumba Iron Ore Limited's (JSE:KIO) Stock Up Recently?

Most readers would already be aware that Kumba Iron Ore's (JSE:KIO) stock increased significantly by 13% over the past three months. 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. Specifically, we decided to study Kumba Iron Ore's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Is ROE Calculated?

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 Kumba Iron Ore is:

28% = R19b ÷ R70b (Based on the trailing twelve months to June 2025).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ZAR1 of its shareholder's investments, the company generates a profit of ZAR0.28.

View our latest analysis for Kumba Iron Ore

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Kumba Iron Ore's Earnings Growth And 28% ROE

At first glance, Kumba Iron Ore seems to have a decent ROE. On comparing with the average industry ROE of 4.3% the company's ROE looks pretty remarkable. Needless to say, we are quite surprised to see that Kumba Iron Ore's net income shrunk at a rate of 11% over the past five years. Therefore, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

However, when we compared Kumba Iron Ore's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 4.5% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. 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 Kumba Iron Ore is trading on a high P/E or a low P/E, relative to its industry.

Is Kumba Iron Ore Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 82% (implying that 18% of the profits are retained), most of Kumba Iron Ore's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 2 risks we have identified for Kumba Iron Ore visit our risks dashboard for free.

In addition, Kumba Iron Ore has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 71% of its profits over the next three years. Regardless, Kumba Iron Ore's ROE is speculated to decline to 20% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we feel that Kumba Iron Ore certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. That being so, the latest industry analyst forecasts show that analysts are forecasting a slight improvement in the company's future earnings growth. This could offer some relief to the company's existing shareholders. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.