It’s hard to get excited after looking at the recent performance of MECOM Power and Construction (HKG:1183), as its stock is down 6.8% over the past week. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we have decided to focus on the ROE of MECOM Power and Construction.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
Check out our latest analysis for MECOM Power and Construction
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for MECOM Power and Construction is:
21% = MO$92 million ÷ MO$445 million (based on trailing twelve months to June 2021).
“Yield” is the income the business has earned over the past year. Another way to think about this is that for every HK$1 of equity, the company was able to make a profit of HK$0.21.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
MECOM Power and Construction earnings growth and ROE of 21%
For starters, MECOM Power and Construction’s ROE looks acceptable. Compared to the industry average ROE of 9.0%, the company’s ROE looks quite remarkable. Despite this, MECOM Power and Construction’s five-year net income growth has been fairly stable over the past five years. Therefore, there could be other aspects that could potentially impede the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
We then compared MECOM Power and Construction’s net income growth with the industry and found that the industry declined by 1.2% over the same period, which somewhat improves the company’s growth. .
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you may want to check whether MECOM Power and Construction is trading on a high P/E or a low P/E, relative to its industry.
Does MECOM Power and Construction effectively use its retained earnings?
MECOM Power and Construction has a three-year median payout ratio as high as 101%, meaning the company is paying a dividend that is beyond its means. MECOM Power and Construction’s lack of earnings growth is therefore not a surprise. Paying a dividend higher than reported earnings is not a sustainable decision. This is indicative of a risk.
Additionally, MECOM Power and Construction has paid dividends over a four-year period, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. .
All in all, it seems that MECOM Power and Construction has positive aspects for its business. Namely, its strong earnings growth, which was likely due to its high ROE. However, investors could have benefited even more from the high ROE if the company had reinvested more of its earnings. As stated earlier, the company retains virtually none of its profits. So far, we have only had a brief discussion of corporate earnings growth. So it might be worth checking that out. free detailed graph MECOM Power and Construction’s past revenue, as well as revenue and cash flow to get a deeper insight into the company’s performance.
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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.