Monadelphous Group (ASX:MND) stock is up 38% in the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In this article, we decided to focus on the ROE of Monadelphous Group.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Discover our latest analysis for Monadelphous Group
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Monadelphous Group is:
13% = AU$52 million ÷ AU$412 million (based on trailing 12 months to June 2022).
The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every Australian dollar of share capital it has, the company has made a profit of 0.13 Australian dollars.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Growth in Monadelphous Group profits and ROE of 13%
At first glance, Monadelphous Group appears to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 14%. As you might expect, the 9.5% decline in net profit reported by Monadelphous Group is a bit of a surprise. So there could be other aspects that could explain this. These include poor revenue retention or poor capital allocation.
So, in a next step, we benchmarked Monadelphous Group’s performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 17%. during the same period.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Has the market priced in MND’s future prospects? You can find out in our latest infographic research report on intrinsic value.
Does Monadelphous Group effectively reinvest its profits?
Monadelphous Group’s declining profits are not surprising given that the company spends the bulk of its profits on paying dividends, judging by its three-year median payout ratio of 89% (or a 11% retention). The company has only a small pool of capital left to reinvest – A vicious cycle that does not benefit the company in the long term.
Furthermore, the Monadelphous Group has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. ‘company. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 86%. Still, forecasts suggest Monadelphous Group’s future ROE will hit 21%, even though the company’s payout ratio isn’t expected to change much.
Overall, we believe Monadelphous Group has positive attributes. However, although the company has a high ROE, its earnings growth figure is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays out the rest as dividends. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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