United States Lime & Minerals' (NASDAQ:USLM) stock is up by a considerable 14% over the past month. 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 United States Lime & Minerals' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for United States Lime & Minerals is:
12% = US$27m ÷ US$228m (Based on the trailing twelve months to June 2020).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.12.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
United States Lime & Minerals' Earnings Growth And 12% 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 11%. This certainly adds some context to United States Lime & Minerals' moderate 13% net income growth seen over the past five years.
As a next step, we compared United States Lime & Minerals' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 16% in the same period.
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. 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 Making Efficient Use Of 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.
Moreover, United States Lime & Minerals is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.
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 substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for United States Lime & Minerals.
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.
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