Moog Inc. (NYSE:MOG.A) fundamentals look pretty solid: Could the market be wrong about the stock?

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It’s hard to get excited after watching Moog’s (NYSE:MOG.A) recent performance, as its stock is down 15% in the past three months. 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. Specifically, we decided to study Moog’s ROE in this article.

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 short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Moog

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 Moog is:

10% = $146 million ÷ $1.4 billion (based on trailing 12 months to April 2022).

“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.10.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. 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.

A side-by-side comparison of Moog’s earnings growth and 10% ROE

For starters, Moog’s ROE seems acceptable. Additionally, the company’s ROE is similar to the industry average of 10%. However, while Moog had a fairly respectable ROE, its five-year net income decline rate was 5.8%. So there could be other aspects that could explain this. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.

However, when we compared Moog’s growth with the industry, we found that while the company’s earnings declined, the industry saw earnings growth of 2.9% over the same period. period. It’s quite worrying.

NYSE:MOG.A Past Earnings Growth June 24, 2022

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 then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about Moog’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.

Does Moog effectively reinvest its profits?

Moog’s low three-year median payout ratio of 20% (or an 80% retention rate) over the past three years should mean the company is retaining most of its earnings to fuel growth, but earnings of society have actually declined. The low payout should mean that the company keeps most of its profits and therefore should see some growth. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.

Additionally, Moog has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that shareholders prefer consistent dividends even though earnings have declined. Existing analyst estimates suggest the company’s future payout ratio is likely to drop to 1.6% over the next three years. The fact that the company’s ROE is expected to be 24% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we think Moog certainly has some positives to consider. However, we are disappointed to see a lack of earnings growth, even despite a high ROE and high reinvestment rate. We believe there could be external factors that could negatively impact the business. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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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