FMG share price in focus
Fortescue Limited is an iron ore production and exploration company founded by renowned Australian polymath Andrew “Toogie” Forrest. The company was founded in 2003 and has assets in the Pilbara region of Western Australia.
Fortescue’s primary activity is iron ore production, which exports more than 190 million tonnes annually. However, Fortescue has also intensified exploration activities for materials such as copper, rare earths and lithium. Countries including Australia, Argentina, Chile, Brazil and Kazakhstan are included in this research.
This is part of Fortescue’s long-term strategy to capitalize on the shift to renewable energy. Demand for copper, lithium and other rare earths is expected to skyrocket with increased production of batteries and electric vehicles, and Fortescue plans to meet that demand.
Key metrics
If you’ve ever tried to read a company’s income statement on an annual report, you know how complicated it can be. Although there are many ways you can break down a statement, there are three main ones. Revenue, Gross Marginand profit.
Revenue is important for obvious reasons – everything else (profits, margins, return on equity, etc.) is downstream of a company’s ability to generate sales and revenue. What we are looking for is not an absolute number, but rather. trend. FMG last reported annual revenue of $18,220m with a Compound Annual Growth Rate (CAGR) -6.5% per annum over the last 3 years.
The next thing we’ll want to look at is gross margin. Gross margin tells us how profitable the underlying products/services are – before you take into account all overhead costs, how much money does the company make selling $100 worth of goods and services? FMG’s most recently reported gross margin was 52.4%.
Finally, we get the profit, the real headline number. Last fiscal year Fortescue Limited reported a profit of $5,683 million. This compares to 3 years ago when they made a profit of $10,295m, representing a CAGR of -18.0%.
Financial health of FMG shares
Next, we can consider Capital Health of the company. What we are trying to work out is whether the company is generating a reasonable return on their equity (total shareholder value) and whether they have a good buffer of safety. There is an important step to consider. Net debt. It is simply the total debt minus the company’s cash holdings.
In FMG’s case, current net debt is $497 million. A higher number here means that the company has a lot of debt which potentially means higher interest payments, higher volatility, and higher sensitivity to interest rates. A negative value, on the other hand, indicates that the company has more cash than debt, which can be seen as good (a large safety buffer) or bad (inefficient capital allocation).
A metric that may be more valuable to us. Debt/Equity Percentage. It tells us how much debt the company has compared to shareholder ownership. In other words, how leveraged is the company? Fortescue Limited’s debt/equity ratio is 27.6%, which means they have more equity than debt.
Finally, we can see Return on Equity (ROE). ROE tells us how much profit a company is making as a percentage of its total equity – a high number indicates that the company is effectively allocating capital and creating value, while a low number indicates that the company’s growth may be starting to slow. FMG generated an ROE of 30.2% in FY24.
What to make of FMG shares?
One way to get a ‘fast read’ of where the FMG share price is may be to study something like the dividend yield over time. Remember, the dividend yield is effectively ‘cash flow’ to a shareholder, but it can fluctuate from year to year or between payments. Currently, shares of Fortescue Limited have a dividend yield of around 9.78%, compared to a 5-year average of 10.52%. Simply put, shares of FMG are trading below their historical average dividend yield. Be careful how you interpret this information – it could mean that profits have fallen, or the share price is rising, or both. In FMG’s case, last year’s dividend was higher than the 3-year average, so the dividend is growing.
Rask websites offer free online investing courses, created by analysts explaining things like discounted cash flow (DCF) and dividend discount models (DDM). They even include free valuation spreadsheets! Both these models will be a better way to value FMG share price.
