Most readers would already be aware that CSN Mineração’s (BVMF:CMIN3) stock increased significantly by 12% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study CSN Mineração’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.
How Do You Calculate Return On Equity?
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 CSN Mineração is:
45% = R$6.0b ÷ R$13b (Based on the trailing twelve months to March 2021).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every R$1 worth of shareholders’ equity, the company generated R$0.45 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
CSN Mineração’s Earnings Growth And 45% ROE
To begin with, CSN Mineração has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 16% the company’s ROE is quite impressive. So, the substantial 40% net income growth seen by CSN Mineração over the past five years isn’t overly surprising.
We then compared CSN Mineração’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 51% in the same period, which is a bit concerning.
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. 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 CSN Mineração is trading on a high P/E or a low P/E, relative to its industry.
Is CSN Mineração Using Its Retained Earnings Effectively?
CSN Mineração 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. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like CSN Mineração is reinvesting its earnings efficiently.
Our latest analyst data shows that the future payout ratio of the company is expected to rise to 87% over the next three years. Despite the higher expected payout ratio, the company’s ROE is not expected to change by much.
Overall, we are quite pleased with CSN Mineração’s performance. 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 respectable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company’s earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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