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Lundin Mining (TSE:LUN) has had a rough week with its share price down 16%. 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. 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Lundin Mining

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 Lundin Mining is:

15% = US$734m US$4.8b (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.15 in profit.

So far, we've learned that ROE is a measure of a company's profitability. 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.

To start with, Lundin Mining's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 15%. Consequently, this likely laid the ground for the impressive net income growth of 23% seen over the past five years by Lundin Mining. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Lundin Mining's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 29% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. Its 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. What is LUN worth today? The intrinsic value infographic in our free research report helps visualize whether LUN is currently mispriced by the market.

Lundin Mining has a three-year median payout ratio of 41% (where it is retaining 59% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Lundin Mining is reinvesting its earnings efficiently.

Moreover, Lundin Mining is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 54% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 11%, over the same period.

Overall, we are quite pleased with Lundin Mining's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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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Lundin Mining Corporation's (TSE:LUN) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong? - Simply Wall St