Kumba Iron Ore Limited (JSE: KIO) fundamentals look pretty solid: Could the market be wrong about the stock?


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Kumba Iron Ore (JSE: KIO) had a rough three-month period with its stock price down 32%. However, stock prices are usually determined by a company’s long-term financial data, which in this case looks pretty respectable. In particular, we will be paying close attention to Kumba Iron Ore’s ROE today.

Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

Check out our latest review for Kumba iron ore

How to calculate return on equity?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE of Kumba iron ore is:

66% = R49b ÷ R75b (Based on the last twelve months up to June 2021).

“Return” refers to a company’s profits over the past year. Another way to look at this is that for every ZAR1 value of equity, the company was able to make a profit of ZAR 0.66.

What is the relationship between ROE and profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

Kumba Iron Ore profit growth and 66% ROE

First, we recognize that Kumba Iron Ore has a significantly high ROE. In addition, the company’s ROE is higher than the industry average of 31%, which is quite remarkable. Under these circumstances, Kumba Iron Ore’s net profit growth of 31% over five years was to be expected.

Next, comparing Kumba Iron Ore’s net income growth with the industry, we found that the reported growth of the company is similar to the industry average growth rate of 33% over the same period.

JSE: KIO Past Profit Growth on November 20, 2021

Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Has the market assessed KIO’s future prospects? You can find out in our latest Intrinsic Value infographic research report.

Does Kumba Iron Ore Use Its Profits Effectively?

Kumba Iron Ore has a large three-year median payout ratio of 91%, which means the company only keeps 9.5% of its revenue. This implies that the company has been able to achieve high profit growth despite returning most of its profits to shareholders.

Additionally, Kumba Iron Ore has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 96%. However, Kumba Iron Ore’s future ROE is expected to drop to 37% despite the expected little change in the company’s payout ratio.

Conclusion

Overall, we think Kumba Iron Ore has some positive attributes. Especially the profit growth which was supported by an impressive ROE. Still, the high ROE could have been even more beneficial for investors if the company had reinvested more of its profits. As noted earlier, the current rate of reinvestment appears to be negligible. That said, studying the latest analysts’ forecast, we found that while the company has seen past earnings growth, analysts expect future earnings to decline. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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About Meredith Campagna

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