Lundin Mining's (TSE:LUN) stock is up by a considerable 18% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Lundin Mining's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Lundin Mining

How To Calculate Return On Equity?

Return on equity 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 Lundin Mining is:

1.7% = US$72m ÷ US$4.2b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.02 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Lundin Mining's Earnings Growth And 1.7% ROE

It is quite clear that Lundin Mining's ROE is rather low. Not just that, even compared to the industry average of 8.3%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Lundin Mining grew its net income at a significant rate of 28% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

We then compared Lundin Mining's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 37% in the same period, which is a bit concerning.

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). 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 Lundin Mining's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lundin Mining Efficiently Re-investing Its Profits?

Lundin Mining has a three-year median payout ratio of 33% (where it is retaining 67% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Lundin Mining is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Lundin Mining has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 17% over the next three years. As a result, the expected drop in Lundin Mining's payout ratio explains the anticipated rise in the company's future ROE to 9.5%, over the same period.

Summary

In total, it does look like Lundin Mining has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

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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