Fortescue Metals Group Limited (ASX: FMG) shares have made a considerable profit over the last three years. But can the business keep making big profits in 2023 and beyond?
As one of the biggest iron ore shares in the world, Fortescue's success is highly linked to the changing iron ore price.
The last 12 months have been volatile for iron. But the last couple of months have been notable for the commodity. According to Commsec, the iron ore price has reached US$122 per tonne. That's well up from around the US$80 mark where it sat in early November.
Any extra revenue per tonne adds considerably to net profit before tax because mining costs don't usually change much month to month. A higher commodity price can generate a lot of extra cash flow for the business, which can lead to bigger dividends as well.
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How much profit is Fortescue going to make in 2023?
I think one of the most important financial figures is the earnings per share (EPS). There's not much point growing profit if it doesn't lead to rising EPS over time, in my opinion. Certainly, growing EPS can be one of the key factors in driving the Fortescue share price higher.
The EPS can give context to the share price, particularly in price/earnings (P/E) ratio terms.
According to the forecast on Commsec, Fortescue could make EPS of $2.07 in FY23. This would put the Fortescue share price at 11 times FY23's estimated earnings. This could also enable Fortescue to pay an annual dividend of around $1.48 per share. This would translate into a grossed-up dividend yield of 9.4%.
However, profit is expected to reduce in FY24, with an EPS forecast of $1.62. EPS might reduce again to $1.41 in FY25, But, estimates change all the time, so time will tell how much profit the business will actually make in FY24 and beyond.
What's improving the outlook?
Fortescue seems to be benefiting from the improving sentiment about China. For most of 2022, the Asian economic superpower was grappling with COVID-19 and lockdowns, which meant the country wasn't at full economic capacity.
But, after an adjustment of COVID-19 restrictions in China, essentially a lifting of curbs, investors are now seemingly feeling more confident about the situation.
While the iron ore price is unpredictable, every month that it's at a price of US$120 per tonne or higher is helpful for Fortescue to generate strong profit.
The business also continues to make progress on its green energy targets of decarbonising its own operations and making steps towards producing green hydrogen.
Foolish takeaway
Fortescue is seeing positive sentiment at the moment, with how strongly the iron ore price has rebounded in the last few months. This should enable it to produce another year of strong profit in 2023.
