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Declining Stock and Solid Fundamentals: Is The Market Wrong About United States Lime & Minerals, Inc. (NASDAQ:USLM)?

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With its stock down 10% over the past three months, it is easy to disregard United States Lime & Minerals (NASDAQ:USLM). 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. Particularly, we will be paying attention to United States Lime & Minerals' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for United States Lime & Minerals

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 United States Lime & Minerals is:

13% = US$37m ÷ US$278m (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.13.

Why Is ROE Important For 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.

United States Lime & Minerals' Earnings Growth And 13% ROE

To begin with, United States Lime & Minerals seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 13%. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by United States Lime & Minerals.

Next, on comparing with the industry net income growth, we found that United States Lime & Minerals' reported growth was lower than the industry growth of 21% in the same period, which is not something we like to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 United States Lime & Minerals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is United States Lime & Minerals Efficiently Re-investing Its Profits?

United States Lime & Minerals has a low three-year median payout ratio of 12%, meaning that the company retains the remaining 88% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, United States Lime & Minerals has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with United States Lime & Minerals' 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 a good amount of growth in its earnings.

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.