Is the recent performance of MTU Aero Engines AG (ETR:MTX) shares influenced in any way by its fundamentals?

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MTU Aero Engines (ETR:MTX) stock is up 17% in the past month. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . In this article, we decided to focus on the ROE of MTU Aero Engines.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check opportunities and risks within the aerospace and defense industry DE.

How to calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for MTU Aero Engines is:

8.7% = €248 million ÷ €2.8 billion (based on the last twelve months until June 2022).

The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every euro of share capital it has, the company has made a profit of 0.09 euro.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

MTU Aero Engines earnings growth and ROE of 8.7%

For starters, MTU Aero Engines’ ROE looks acceptable. Still, the fact that the company’s ROE is below the industry average of 13% tempers our expectations. Additionally, MTU Aero Engines’ net profit has declined by 16% over the past five years. Keep in mind that the company has a high ROE. It’s just that the industry’s ROE is higher. Therefore, there could be other aspects that result in less revenue. These include poor revenue retention or poor capital allocation.

However, when we compared the growth of MTU Aero Engines with the industry, we found that although the company’s earnings declined, the industry experienced 10% earnings growth over the same period. period. It’s quite worrying.

XTRA: MTX Past Earnings Growth November 3, 2022

Earnings growth is an important metric to consider when evaluating a stock. 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. Is MTU Aero Engines valued fairly compared to other companies? These 3 assessment metrics might help you decide.

Does MTU Aero Engines use its profits efficiently?

Despite a normal three-year median payout rate of 48% (ie, a retention rate of 52%), the fact that MTU Aero Engines’ earnings have declined is quite puzzling. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.

Additionally, MTU Aero Engines has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 37% over the next three years. Thus, the expected decline in the payout rate explains the expected increase in the company’s ROE to 18%, over the same period.

Conclusion

Overall, we think MTU Aero Engines definitely has some positives to consider. However, although the company has a decent ROE and high earnings retention, its earnings growth figure is quite disappointing. This suggests that there could be an external threat to the business, which is hampering growth. That said, we have studied the latest analyst forecasts and found that although the company has decreased earnings in the past, analysts expect earnings to increase in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

Valuation is complex, but we help make it simple.

Find out if MTU Aero Engines is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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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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