U.S. Markets closed
  • S&P 500

    3,768.25
    -27.29 (-0.72%)
     
  • Dow 30

    30,814.26
    -177.24 (-0.57%)
     
  • Nasdaq

    12,998.50
    -114.10 (-0.87%)
     
  • Russell 2000

    2,123.20
    -32.15 (-1.49%)
     
  • Crude Oil

    52.04
    -1.53 (-2.86%)
     
  • Gold

    1,827.70
    -23.70 (-1.28%)
     
  • Silver

    24.83
    -0.97 (-3.77%)
     
  • EUR/USD

    1.2085
    -0.0079 (-0.6526%)
     
  • 10-Yr Bond

    1.0970
    -0.0320 (-2.83%)
     
  • Vix

    24.34
    +1.09 (+4.69%)
     
  • GBP/USD

    1.3583
    -0.0057 (-0.4143%)
     
  • USD/JPY

    103.8000
    -0.0420 (-0.0404%)
     
  • BTC-USD

    36,264.03
    -92.57 (-0.25%)
     
  • CMC Crypto 200

    701.93
    -33.21 (-4.52%)
     
  • FTSE 100

    6,735.71
    -66.25 (-0.97%)
     
  • Nikkei 225

    28,519.18
    -179.12 (-0.62%)
     

Is Champion Iron Limited's (ASX:CIA) Latest Stock Performance A Reflection Of Its Financial Health?

Simply Wall St
·3 min read

Most readers would already be aware that Champion Iron's (ASX:CIA) stock increased significantly by 55% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Champion Iron'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Champion Iron

How Do You Calculate Return On Equity?

Return on equity 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 Champion Iron is:

43% = CA$236m ÷ CA$552m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.43.

What Has ROE Got To Do With 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 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.

Champion Iron's Earnings Growth And 43% ROE

Firstly, we acknowledge that Champion Iron has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. Under the circumstances, Champion Iron's considerable five year net income growth of 63% was to be expected.

We then compared Champion Iron's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 32% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for CIA? You can find out in our latest intrinsic value infographic research report.

Is Champion Iron Making Efficient Use Of Its Profits?

Conclusion

On the whole, we feel that Champion Iron's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.

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