The shares of Ero Copper Corp. (TSE: ERO) fell, but fundamentals look strong: is the market wrong?

Ero Copper (TSE: ERO) had a tough week with its stock price down 7.0%. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In particular, we will be paying close attention to Ero Copper’s ROE today.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest review for Ero Copper

How is the ROE calculated?

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 Ero Copper is:

61% = US $ 138 million ÷ US $ 225 million (based on the last twelve months to March 2021).

The “return” is the income the business has earned over the past year. One way to conceptualize this is that for every C $ 1 of shareholder capital it has, the company has made C $ 0.61 in profit.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

Ero Copper profit growth and 61% ROE

First of all, we love that Ero Copper has an impressive ROE. Additionally, the company’s ROE is 16% higher than the industry average, which is quite remarkable. As a result, Ero Copper’s exceptional 57% net profit growth observed over the past five years is no surprise.

Then, comparing with the industry’s net income growth, we found that Ero Copper’s growth is quite high compared to the industry’s average growth of 29% over the same period, which is great to see.

Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Ero Copper is trading high P / E or low P / E, relative to its industry.

Is Ero Copper Using Profits Effectively?

Conclusion

Overall, we think Ero Copper’s performance has been quite good. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. Unsurprisingly, this led to impressive profit growth. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.

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