Sociedad Química y Minera de Chile S.A.'s (NYSE:SQM) Stock Is Going Strong: Have Financials A Role To Play?
Sociedad Química y Minera de Chile’s (NYSE:SQM) stock is up by a considerable 19% over the past three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Sociedad Química y Minera de Chile’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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Sociedad Química y Minera de Chile
How Is ROE Calculated?
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 Sociedad Química y Minera de Chile is:
11% = US$226m ÷ US$2.1b (Based on the trailing twelve months to June 2020).
The ‘return’ is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.11 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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.
Sociedad Química y Minera de Chile’s Earnings Growth And 11% ROE
To begin with, Sociedad Química y Minera de Chile seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.7%. Consequently, this likely laid the ground for the decent growth of 7.3% seen over the past five years by Sociedad Química y Minera de Chile.
As a next step, we compared Sociedad Química y Minera de Chile’s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 7.6% in the same period.
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). This then helps them determine if the stock is placed for a bright or bleak future. Is Sociedad Química y Minera de Chile fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Sociedad Química y Minera de Chile Making Efficient Use Of Its Profits?
While Sociedad Química y Minera de Chile has a three-year median payout ratio of 100% (which means it retains 0.001% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn’t hampered its ability to grow.
Moreover, Sociedad Química y Minera de Chile 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. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 64% over the next three years. The fact that the company’s ROE is expected to rise to 22% over the same period is explained by the drop in the payout ratio.
Summary
On the whole, we do feel that Sociedad Química y Minera de Chile has some positive attributes. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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.
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