Industrial Metals & Mining company Rio Tinto Plc is standing out today, surging to $63.41 and marking a 3.6% change. In comparison the S&P 500 moved only 0.0%. RIO is -20.84% below its average analyst target price of $80.1, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, shares of Rio Tinto Plc have offered a similar return to the S&P 500, moving 11.0%.
Rio Tinto Group engages in exploring, mining, and processing mineral resources worldwide. The company belongs to the basic materials sector, which includes the chemical, coal, mining, aluminum, and steel industries. The demand for these materials is dependent on economic cycles: when the economy is growing, companies across all sectors ramp up production, which increases demand from basic materials companies.
Conversely, when the economy slows down, demand for these materials decreases. The stock prices of this sector tend to follow the ebbs and flows of these demand cycles — but accurately predicting where we are presently in the economic cycle is a matter of intense debate.
Rio Tinto Plc's trailing 12 month P/E ratio is 12.0, based on its trailing EPS of $5.27. The company has a forward P/E ratio of 15.1 according to its forward EPS of $4.21 -- which is an estimate of what its earnings will look like in the next quarter.
As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US basic materials companies is 10.03, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To gauge the health of Rio Tinto Plc's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.
RIO's average gross profit margins over the last four years are 50.7%, which indicate it has a potential competitive advantage in its market. These margins have slightly increased over the last four years, with an average growth rate of 0.1%. Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Rio Tinto Plc's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-01-01 | 21,822,000 | -6,144,000 | 27,966,000 | 37.42 |
| 2020-01-01 | 14,912,000 | -5,439,000 | 20,351,000 | 17.97 |
| 2019-01-01 | 11,821,000 | -5,430,000 | 17,251,000 | -6.07 |
| 2018-01-01 | 13,884,000 | -4,482,000 | 18,366,000 | 60.02 |
| 2017-01-01 | 8,465,000 | -3,012,000 | 11,477,000 | -18.42 |
| 2016-01-01 | 9,383,000 | -4,685,000 | 14,068,000 |
- Average free cash flow: $18.25 Billion
- Average free cash flown growth rate: 0.0 %
- Coefficient of variability (the lower the better): 37700934911.3 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in RIO have received an annualized dividend yield of 6.5% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Rio Tinto Plc has a P/B ratio of 1.99. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Basic Materials sector, which stood at 2.08 as of the first quarter of 2023.
Rio Tinto Plc is by most measures overvalued because it has an average P/E ratio, an average P/B ratio, and irregular cash flows with a flat trend. The stock has strong growth indicators because it has a an average PEG ratio and decent operating margins with a positive growth rate. We hope you enjoyed this overview of RIO's fundamentals.
