Fenix Resources' (ASX:FEX) stock up by 2.1% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Fenix Resources' ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Fenix Resources

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 Fenix Resources is:

45% = AU$48m ÷ AU$106m (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.45 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Fenix Resources' Earnings Growth And 45% ROE

First thing first, we like that Fenix Resources has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. So, the substantial 71% net income growth seen by Fenix Resources over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Fenix Resources' growth is quite high when compared to the industry average growth of 29% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Fenix Resources''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Fenix Resources Efficiently Re-investing Its Profits?

The three-year median payout ratio for Fenix Resources is 44%, which is moderately low. The company is retaining the remaining 56%. So it seems that Fenix Resources is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.