Could The Market Be Wrong About Ramaco Resources, Inc. (NASDAQ:METC) Given Its Attractive Financial Prospects?
With its stock down 15% over the past month, it is easy to disregard Ramaco Resources (NASDAQ:METC). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Ramaco Resources' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Ramaco Resources
How To Calculate Return On Equity?
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 Ramaco Resources is:
38% = US$116m ÷ US$309m (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.38 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Ramaco Resources' Earnings Growth And 38% ROE
Firstly, we acknowledge that Ramaco Resources has a significantly high ROE. Secondly, even when compared to the industry average of 17% the company's ROE is quite impressive. Under the circumstances, Ramaco Resources' considerable five year net income growth of 53% was to be expected.
As a next step, we compared Ramaco Resources' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 31%.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Ramaco Resources''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Ramaco Resources Using Its Retained Earnings Effectively?
Ramaco Resources has a really low three-year median payout ratio of 11%, meaning that it has the remaining 89% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
While Ramaco Resources has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 114% over the next three years.
Conclusion
Overall, we are quite pleased with Ramaco Resources' performance. 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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
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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.
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