Sociedad Química y Minera de Chile S.A.'s (NYSE:SQM) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 24% over the past month, it is easy to disregard Sociedad Química y Minera de Chile (NYSE:SQM). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Sociedad Química y Minera de Chile’s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Sociedad Química y Minera de Chile

How Do You 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 Sociedad Química y Minera de Chile is:

59% = US$2.1b ÷ US$3.6b (Based on the trailing twelve months to June 2022).

The ‘return’ is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.59 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.

Sociedad Química y Minera de Chile’s Earnings Growth And 59% ROE

First thing first, we like that Sociedad Química y Minera de Chile has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 16% also doesn’t go unnoticed by us. Under the circumstances, Sociedad Química y Minera de Chile’s considerable five year net income growth of 24% was to be expected.

As a next step, we compared Sociedad Química y Minera de Chile’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.3%.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Sociedad Química y Minera de Chile’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sociedad Química y Minera de Chile Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 69% (implying that it keeps only 31% of profits) for Sociedad Química y Minera de Chile suggests that the company’s growth wasn’t really hampered despite it returning most of the earnings to its shareholders.

Besides, Sociedad Química y Minera de Chile has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 81%. As a result, Sociedad Química y Minera de Chile’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 58% for future ROE.

Conclusion

Overall, we are quite pleased with Sociedad Química y Minera de Chile’s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. That being so, according to the latest industry analyst forecasts, the company’s earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.

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