It is hard to get excited after looking at Cleveland-Cliffs’ (NYSE:CLF) recent performance, when its stock has declined 51% over the past three months. 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 Cleveland-Cliffs’ ROE in this article.
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.
See our latest analysis for Cleveland-Cliffs
How Do You 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 Cleveland-Cliffs is:
57% = US$3.8b ÷ US$6.6b (Based on the trailing twelve months to March 2022).
The ‘return’ is the profit 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 $0.57 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
Cleveland-Cliffs’ Earnings Growth And 57% ROE
To begin with, Cleveland-Cliffs has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 21% also doesn’t go unnoticed by us. So, the substantial 42% net income growth seen by Cleveland-Cliffs over the past five years isn’t overly surprising.
Next, on comparing with the industry net income growth, we found that Cleveland-Cliffs’ growth is quite high when compared to the industry average growth of 25% in the same period, which is great to see.
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). This then helps them determine if the stock is placed for a bright or bleak future. What is CLF worth today? The intrinsic value infographic in our free research report helps visualize whether CLF is currently mispriced by the market.
Is Cleveland-Cliffs Efficiently Re-investing Its Profits?
Given that Cleveland-Cliffs 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
Overall, we are quite pleased with Cleveland-Cliffs’ performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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.
Read More: Declining Stock and Solid Fundamentals: Is The Market Wrong About Cleveland-Cliffs Inc.