Yahoo Finance Are Michael Hill International Limited's (ASX:MHJ) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
It is hard to get excited after looking at Michael Hill International's (ASX:MHJ) recent performance, when its stock has declined 3.0% over the past week. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Michael Hill International's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Michael Hill International
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Michael Hill International is:
24% = AU$47m ÷ AU$200m (Based on the trailing twelve months to January 2023).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.24 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Michael Hill International's Earnings Growth And 24% ROE
First thing first, we like that Michael Hill International has an impressive ROE. Additionally, a comparison with the average industry ROE of 20% also portrays the company's ROE in a good light. Therefore, it looks like the high ROE is what probably supported Michael Hill International's modest 15% growth over the past five years.
As a next step, we compared Michael Hill International's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 21% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One 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 prospects. So, you may want to check if Michael Hill International is trading on a high P/E or a low P/E, relative to its industry.
Is Michael Hill International Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 62% (or a retention ratio of 38%) for Michael Hill International suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Additionally, Michael Hill International has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 60%. As a result, Michael Hill International's ROE is not expected to change by much either, which we inferred from the analyst estimate of 22% for future ROE.
Summary
Overall, we feel that Michael Hill International certainly does have some positive factors to consider. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
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