Antofagasta plc (LON:ANTO) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

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editorial-team@simplywallst.com (Simply Wall St)

Wed, Dec 18, 2024, 7:53 AM 4 min read

With its stock down 7.6% over the past three months, it is easy to disregard Antofagasta (LON:ANTO). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Antofagasta's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Antofagasta

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 Antofagasta is:

9.6% = US$1.2b ÷ US$12b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Antofagasta's Earnings Growth And 9.6% ROE

On the face of it, Antofagasta's ROE is not much to talk about. However, its ROE is similar to the industry average of 9.6%, so we won't completely dismiss the company. Having said that, Antofagasta has shown a modest net income growth of 17% over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Antofagasta's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 10%.

past-earnings-growth — LSE:ANTO Past Earnings Growth December 18th 2024

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. 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 Antofagasta is trading on a high P/E or a low P/E, relative to its industry.

Is Antofagasta Efficiently Re-investing Its Profits?

Antofagasta has a three-year median payout ratio of 42%, which implies that it retains the remaining 58% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Antofagasta is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. As a result, Antofagasta's ROE is not expected to change by much either, which we inferred from the analyst estimate of 10.0% for future ROE.

Conclusion

Overall, we feel that Antofagasta certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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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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.