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Will Weakness in Northern Star Resources Limited's (ASX:NST) Stock Prove Temporary Given Strong Fundamentals?

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Simply Wall St
·4 min read
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Northern Star Resources (ASX:NST) has had a rough three months with its share price down 13%. 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. Specifically, we decided to study Northern Star Resources' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Northern Star 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 Northern Star Resources is:

12% = AU$258m ÷ AU$2.1b (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.12 in profit.

Why Is ROE Important For 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. 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.

Northern Star Resources' Earnings Growth And 12% ROE

To begin with, Northern Star Resources seems to have a respectable ROE. Even when compared to the industry average of 13% the company's ROE looks quite decent. This certainly adds some context to Northern Star Resources' moderate 9.2% net income growth seen over the past five years.

We then compared Northern Star Resources' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 32% in the same period, which is a bit concerning.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Northern Star Resources fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Northern Star Resources Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 44% (implying that the company retains 56% of its profits), it seems that Northern Star Resources is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Northern Star Resources is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 22% over the next three years. The fact that the company's ROE is expected to rise to 25% over the same period is explained by the drop in the payout ratio.

Conclusion

In total, we are pretty happy with Northern Star Resources' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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 (at) simplywallst.com.