Warrior Met Coal, Inc. (NYSE:HCC) Stock Has Seen Strong Momentum: Does That Call For Further Study Of Its Financial Outlook?

Most readers will already know that Warrior Met Coal Inc (NYSE:HCC) stock is up a significant 51% in the past three months. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . In particular, we’ll be paying attention to Warrior Met Coal’s ROE today.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Warrior Met Coal

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Warrior Met Coal is:

17% = $151 million ÷ $872 million (based on trailing 12 months to December 2021).

“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.17.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Warrior Met Coal’s earnings growth and 17% ROE

At first glance, Warrior Met Coal appears to have a decent ROE. Even so, compared to the industry average ROE of 23%, we are not very enthusiastic. Needless to say, the 23% net income decline rate observed by Warrior Met Coal over the past five years is a huge drag. Not to mention that the company has a high ROE to start with, just that it’s below the industry average. Therefore, the decline in earnings could be the result of other factors. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

That being said, we benchmarked Warrior Met Coal’s performance against the industry and were concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 23% in during the same period.

NYSE: HCC Past Earnings Growth March 24, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. If you’re wondering about Warrior Met Coal’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.

Does Warrior Met Coal effectively reinvest profits?

Warrior Met Coal’s low three-year median payout rate of 1.6% (implying it keeps the remaining 98% of its earnings) comes as a surprise when you pair it with declining earnings. The low payout should mean that the company keeps most of its profits and therefore should see some growth. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.

Additionally, Warrior Met Coal has paid dividends over a five-year period, suggesting that maintaining dividend payments is preferred by management even as earnings decline. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to reach 8.5% over the next three years. Therefore, the expected increase in the payout ratio explains why the company’s ROE is expected to decline to 6.3% over the same period.

Conclusion

Overall, we think Warrior Met Coal certainly has some positives to consider. However, although the company has a decent ROE and high earnings retention, its earnings growth figure is quite disappointing. This suggests that there could be an external threat to the business, which is hampering growth. That said, we have studied current analyst estimates and found that analysts expect the company’s earnings growth to improve slightly. The company’s existing shareholders might get a bit of a break after all. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Ian Crawford

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