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Anglo American (LON:AAL) has had a rough three months with its share price down 13%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Anglo American's ROE today.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Anglo American
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 Anglo American is:
18% = US$6.0b ÷ US$34b (Based on the trailing twelve months to December 2022).
The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.18 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. 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.
Anglo American's Earnings Growth And 18% ROE
To start with, Anglo American's ROE looks acceptable. On comparing with the average industry ROE of 14% the company's ROE looks pretty remarkable. Probably as a result of this, Anglo American was able to see a decent growth of 19% over the last five years.
We then performed a comparison between Anglo American's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 17% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. What is AAL worth today? The intrinsic value infographic in our free research report helps visualize whether AAL is currently mispriced by the market.