Most readers already know that Freeport-McMoRan (NYSE: FCX) stock has risen significantly by 27% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In particular, we’ll be paying close attention to Freeport-McMoRan’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Freeport-McMoRan is:
22% = US $ 4.9 billion ÷ US $ 23 billion (based on the last twelve months to September 2021).
The “return” is the amount earned after tax over the past twelve months. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.22.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Freeport-McMoRan profit growth and 22% ROE
At first glance, Freeport-McMoRan appears to have a decent ROE. Even compared to the industry average of 20%, the company’s ROE looks quite correct. Therefore, this likely laid the groundwork for the impressive 38% net income growth seen over the past five years by Freeport-McMoRan. We believe that there could also be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
We then compared Freeport-McMoRan’s net income growth with the industry and we are delighted to see that the company’s growth figure is higher than that of the industry which has a 15% growth rate. during the same period.
NYSE: FCX Past Earnings Growth as of January 1, 2022
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Is the FCX valued enough? This intrinsic business value infographic has everything you need to know.
Is Freeport-McMoRan Using Profits Effectively?
Freeport-McMoRan’s three-year median payout ratio is less than 7.3%, implying that it retains a higher percentage (93%) of its profits. So it appears that Freeport-McMoRan is reinvesting its profits massively to grow its business, which is reflected in its profit growth.
In addition, Freeport-McMoRan is committed to continuing to share its profits with shareholders that we deduce from its long history of paying dividends for at least ten years. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to reach 32% over the next three years. Consequently, the higher expected payout rate explains the drop in the company’s expected ROE (to 15%) over the same period.
Overall, we are quite happy with the performance of Freeport-McMoRan. Specifically, we like the fact that the company is reinvesting a huge portion of its profits at a high rate of return. This of course enabled the company to experience substantial growth in profits. However, according to the latest forecast from industry analysts, the company’s profits are expected to decline in the future. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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