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Yancoal Australia (ASX:YAL) has had a great run on the share market with its stock up by a significant 24% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Yancoal Australia's ROE in this article.
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 Yancoal Australia
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Yancoal Australia is:
22% = AU$1.8b ÷ AU$8.4b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.22 in profit.
Why Is ROE Important For 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.
A Side By Side comparison of Yancoal Australia's Earnings Growth And 22% ROE
At first glance, Yancoal Australia seems to have a decent ROE. Especially when compared to the industry average of 15% the company's ROE looks pretty impressive. This certainly adds some context to Yancoal Australia's exceptional 33% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing Yancoal Australia's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 33% over the last few years.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is YAL fairly valued? This infographic on the company's intrinsic value has everything you need to know.