Yahoo Finance CF Industries Holdings, Inc.'s (NYSE:CF) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?
It is hard to get excited after looking at CF Industries Holdings' (NYSE:CF) recent performance, when its stock has declined 15% 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. Particularly, we will be paying attention to CF Industries Holdings' ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 CF Industries Holdings
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for CF Industries Holdings is:
18% = US$1.4b ÷ US$8.0b (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.18.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
CF Industries Holdings' Earnings Growth And 18% ROE
To start with, CF Industries Holdings' ROE looks acceptable. On comparing with the average industry ROE of 10% the company's ROE looks pretty remarkable. This certainly adds some context to CF Industries Holdings' exceptional 40% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
We then compared CF Industries Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same 5-year period.
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). Doing so will help them establish if the stock's future looks promising or ominous. Is CF Industries Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is CF Industries Holdings Making Efficient Use Of Its Profits?
CF Industries Holdings has a really low three-year median payout ratio of 16%, meaning that it has the remaining 84% left over to reinvest into its business. So it looks like CF Industries Holdings is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, CF Industries Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 30% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 12% over the same period.
Conclusion
In total, we are pretty happy with CF Industries Holdings' 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. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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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