Most readers will already know that Manutan International (EPA:MAN) stock is up a significant 15% over the past month. But the company’s key financial indicators seem to differ across the board, leading us to wonder whether the company’s current share price momentum can be sustained or not. We will be paying particular attention today to the ROE of Manutan International.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Manutan International
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the formula above, Manutan International’s ROE is:
8.1% = €42m ÷ €521m (based on the last twelve months until September 2021).
“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every euro of share capital it has, the company has made a profit of 0.08 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. 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. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Side-by-side comparison of Manutan International’s 8.1% earnings and ROE growth
At first glance, Manutan International’s ROE does not look so attractive. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 13%. Thus, the weak growth in net income of 2.3% observed by Manutan International over the last five years could probably be the result of the low ROE.
Then, comparing with the sector’s net income growth, we found that Manutan International’s reported growth was lower than the sector’s growth of 30% over the same period, which we don’t like to see.
Earnings growth is an important metric to consider when evaluating a stock. 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 Manutan International is trading on a high P/E or a low P/E, relative to its industry.
Does Manutan International use its profits efficiently?
Despite a three-year normal median payout ratio of 30% (or a retention rate of 70% over the past three years, Manutan International has experienced very low earnings growth, as seen above So there could be other factors at play here that could potentially impede growth, for example, the business has had to deal with some headwinds.
Moreover, Manutan International has been paying dividends for at least ten years, which suggests that management must have perceived that shareholders preferred dividends to earnings growth. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out about 30% of its earnings over the next three years. Thus, forecasts suggest that Manutan International’s future ROE will be 8.9%, again similar to the current ROE.
Overall, we believe that Manutan International’s performance can lend itself to many interpretations. Even though it seems to keep most of its profits, given the low ROE, investors may not be benefiting from all that reinvestment after all. Weak earnings growth suggests our theory is correct. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization 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.