Yahoo Finance Declining Stock and Solid Fundamentals: Is The Market Wrong About Michelmersh Brick Holdings plc (LON:MBH)?
Michelmersh Brick Holdings (LON:MBH) has had a rough three months with its share price down 11%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Michelmersh Brick Holdings' ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Michelmersh Brick Holdings
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Michelmersh Brick Holdings is:
9.0% = UK£7.2m ÷ UK£80m (Based on the trailing twelve months to June 2021).
The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.09 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Michelmersh Brick Holdings' Earnings Growth And 9.0% ROE
At first glance, Michelmersh Brick Holdings seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 9.0%. Consequently, this likely laid the ground for the impressive net income growth of 20% seen over the past five years by Michelmersh Brick Holdings. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Michelmersh Brick Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 16%.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Michelmersh Brick Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Michelmersh Brick Holdings Efficiently Re-investing Its Profits?
Michelmersh Brick Holdings' three-year median payout ratio is a pretty moderate 48%, meaning the company retains 52% of its income. So it seems that Michelmersh Brick Holdings is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Moreover, Michelmersh Brick Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 43%. Accordingly, forecasts suggest that Michelmersh Brick Holdings' future ROE will be 10% which is again, similar to the current ROE.
Summary
In total, we are pretty happy with Michelmersh Brick Holdings' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 1 risk we have identified for Michelmersh Brick Holdings by visiting our risks dashboard for free on our platform here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
