Fortescue Metals Group Ltd (ASX: FMG) shares have done incredibly well for shareholders over the past five years. In that time, the Fortescue share price is up around 400%.
Even so, on one metric, the company could still be too cheap compared to its mining peers BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO).
For these ASX mining shares, the iron ore price is a key element of what drives their profit.
While there's a size difference between the three of them, one factor could show Fortescue may be the best of the three ASX iron ore shares.
Profit margin
When it comes down to it, the main objective of a business is to make profit for its shareholders.
There are many different ways to measure how profitable a business is, but its net profit after tax (NPAT) may be the most important. That said, there is some merit in arguing free cash flow is the most important measure.
As investors, we should be interested in businesses that are generating the strongest profit margins, as that makes the revenue generated more valuable for the company.
When we look at the net profit after tax margin of each of the big mining shares, we could argue Fortescue is the most effective at making profit.
The most recently released profit results from each business, which are all half-year results, show:
The Rio Tinto NPAT margin was 19%.
The Fortescue NPAT margin was 30%.
The BHP NPAT margin was 25%.
If we look at each of those numbers, it is clear Fortescue is currently generating the strongest margin for shareholders.
Valuations
But, if we look at the price/earnings (P/E) ratios for these businesses, Fortescue seems to be trading on the smallest multiple of its current earnings.
According to Commsec, Fortescue shares are trading at just 8x FY23's estimated earnings, BHP shares are trading at over 11.5x FY23's estimated earnings, and Rio Tinto shares are valued at 12x FY23's estimated earnings.
Of course, there's more to valuations than just how much profit companies are making today. Share prices should also take into account new projects that the ASX mining shares are currently working on. Rio Tinto is developing a lithium project, copper projects, and its African iron ore expansion plan.
Still, it's not as though Fortescue doesn't have any projects. Profit from full-capacity operations at Iron Bridge aren't being shown in the copmany's financials yet and its considerable green energy spending isn't making any profit yet either.
On top of that, Fortescue's iron ore is seen as lower grade than BHP's and Rio Tinto's, so its profit may be seen as less resilient and therefore not worthy of a high earnings multiple.
Despite all that, it's still worth noting Fortescue's projected P/E ratio of eight is significantly lower than Rio Tinto's estimated P/E ratio of 12.
If Fortescue shares were trading at 12x earnings, the share price would be 50% higher at more than $32. Though I can't see that happening, partly because Fortescue's earnings are expected to fall in FY24 because of the lower iron ore price. Still, anything could happen with the iron ore price over the next 11 months, as the last few years have shown.
