Could The Market Be Wrong About Grange Resources Limited (ASX:GRR) Given Its Attractive Financial Prospects?




  • In Business
  • 2022-07-03 22:30:53Z
  • By Simply Wall St.
 

With its stock down 26% over the past month, it is easy to disregard Grange Resources (ASX:GRR). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Grange 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Grange Resources

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Grange Resources is:

37% = AU$322m ÷ AU$871m (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.37 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Grange Resources' Earnings Growth And 37% ROE

To begin with, Grange Resources has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. So, the substantial 34% net income growth seen by Grange Resources over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Grange Resources' growth is quite high when compared to the industry average growth of 26% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Grange Resources''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Grange Resources Efficiently Re-investing Its Profits?

Grange Resources' ' three-year median payout ratio is on the lower side at 23% implying that it is retaining a higher percentage (77%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, Grange Resources 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.

Summary

In total, we are pretty happy with Grange Resources' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 3 risks we have identified for Grange Resources visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

COMMENTS

More Related News

Is Skillcast Group plc
Is Skillcast Group plc's (LON:SKL) ROE Of 5.2% Concerning?

One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will...

Rightmove (LON:RMV) Is Paying Out A Dividend Of £0.033
Rightmove (LON:RMV) Is Paying Out A Dividend Of £0.033

Rightmove plc ( LON:RMV ) has announced that it will pay a dividend of £0.033 per share on the 28th of October. This...

MobilityOne Limited (LON:MBO) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?
MobilityOne Limited (LON:MBO) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 28% over the past three months, it is easy to disregard MobilityOne (LON:MBO). However, a closer...

Is 29Metals Limited
Is 29Metals Limited's (ASX:29M) ROE Of 16% Impressive?

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like...

Are Karora Resources Inc.
Are Karora Resources Inc.'s (TSE:KRR) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 34% over the past three months, it is easy to disregard Karora Resources (TSE:KRR). However, the...

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Business