Is Northam Platinum Holdings Limited's (JSE:NPH) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Northam Platinum Holdings (JSE:NPH) has had a great run on the share market with its stock up by a significant 16% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Northam Platinum Holdings' ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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 Northam Platinum Holdings
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 Northam Platinum Holdings is:
33% = R9.8b ÷ R30b (Based on the trailing twelve months to June 2022).
The 'return' refers to a company's earnings over the last year. So, this means that for every ZAR1 of its shareholder's investments, the company generates a profit of ZAR0.33.
What Is The Relationship Between ROE And 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. 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.
Northam Platinum Holdings' Earnings Growth And 33% ROE
To begin with, Northam Platinum Holdings has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 27% the company's ROE is quite impressive. So, the substantial 74% net income growth seen by Northam Platinum Holdings over the past five years isn't overly surprising.
As a next step, we compared Northam Platinum Holdings' 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 45%.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Northam Platinum Holdings is trading on a high P/E or a low P/E, relative to its industry.
Is Northam Platinum Holdings Using Its Retained Earnings Effectively?
Given that Northam Platinum Holdings doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Conclusion
On the whole, we feel that Northam Platinum Holdings' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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