Metcash (ASX:MTS) has had a strong run on the stock market, with its share price increasing by a significant 12% over the past three months. Since the market usually pays for a company's long-term fundamentals, we decided to investigate whether a company's key performance indicators are influencing the market. Specifically, we decided to examine Metcash's ROE in this article.
Return on equity or ROE tests how effectively a company is growing its value and managing investors' money. More simply, it measures a company's profitability in relation to shareholder equity.
Check out our latest analysis for Metcash.
How is ROE calculated?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Metcash's ROE is:
24% = AUD 275 million ÷ AUD 1.1 billion (based on the trailing twelve months to October 2023).
“Return” is the annual profit. That means for every AU$1 of shareholders' equity, the company generated AU$0.24 of his profit.
Why is ROE important for profit growth?
So far, we have learned that ROE is a measure of a company's profitability. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. Assuming all else is equal, companies with both higher return on equity and higher profit retention typically have higher growth rates when compared to companies that don't have the same characteristics.
A side-by-side comparison of Metcash's earnings growth and ROE of 24%.
First of all, we like that Metcash has a good ROE. Second, the company's ROE is quite impressive, even compared to the industry average of 14%. Under these circumstances, Metcash's net profit growth of 37% over five years was expected to be significant.
As a next step, we compared Metcash's net income growth to its industry. We're happy to see that the company's growth is faster than the industry's average growth rate of 18%.
Earnings growth is a big factor in stock valuation. In any case, investors should seek to ascertain whether expected earnings growth or decline has been factored in. Doing so will help you determine whether a stock's future is promising or ominous. What is his MTS worth today? Free research report's intrinsic value infographic helps you visualize whether MTS is currently mispriced in the market.
Is METCASH effectively utilizing its retained earnings?
Metcash's impressive three-year median payout ratio of 83% (retaining only 17% of profits) reflects strong earnings growth, even though the company returns most of its profits to shareholders. This suggests that we were able to achieve this.
Additionally, Metcash has been paying dividends for at least 10 years. This shows that the company is committed to sharing profits with shareholders. Based on the latest analyst forecasts, the company's future dividend payout ratio for the next three years is expected to remain stable at 70%. Therefore, predictions suggest that Metcash's future ROE will be 22%, which is also similar to his current ROE.
summary
Overall, I'm pretty happy with Metcash's performance. We're particularly impressed by the company's strong earnings growth, which we believe is backed by a high ROE. Although the company pays out most of its earnings as dividends, it has managed to grow its earnings despite this, so this is probably a good sign. With that said, the company's revenue growth is expected to slow, as predicted by current analyst forecasts. Are these analyst forecasts based on broader expectations for the industry, or are they based on the company's fundamentals? Click here to be taken to our analyst forecasts page for the company .
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
